Method and apparatus for encoding and decoding prediction residues in a video coding system also disclosed. At the decoder side, a Rice parameter for the target transform coefficient is determined based on a local sum of absolute levels of neighboring transform coefficients of the target transform coefficient. A dependent quantization state is determined and a zero-position variable is determined based on the dependent quantization state and the Rice parameter. One or more coded bits associated with a first syntax element for the target transform coefficient in a transform block are parsed and decoded using one or more codes including a Golomb-Rice code with the Rice parameter, where the first syntax element corresponds to a modified absolute level value of the target transform coefficient. An absolute level value of the target transform coefficient is derived according to the zero-position variable and the first syntax element.