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Difficulty: MediumAdjustments for Depreciation of Fixed Assets

The trial balance extract of a sole trader as at 31st December 2025 showed Motor Vehicles at cost of ₦2,000,000\text{₦}2,000,000 and Provision for Depreciation on Motor Vehicles (1st January 2025) of ₦600,000\text{₦}600,000.

On 1st July 2025, an additional motor vehicle was bought for ₦800,000\text{₦}800,000, and initial delivery charges of ₦100,000\text{₦}100,000 incurred to bring the vehicle into operational use were incorrectly charged to general motor expenses.

Depreciation is charged at 20%20\% per annum using the reducing balance method, calculated on a pro-rata basis for additions. What is the total depreciation charge on motor vehicles in the Profit and Loss Account for the year ended 31st December 2025?

  1. A
    ₦360,000\text{₦}360,000
  2. ₦370,000\text{₦}370,000Answer
  3. C
    ₦460,000\text{₦}460,000
  4. D
    ₦490,000\text{₦}490,000

Answer

₦370,000\text{₦}370,000
The correct charge to the Profit and Loss account is ₦370,000\text{₦}370,000. The delivery charge of ₦100,000\text{₦}100,000 must be capitalized, making the cost of the new vehicle ₦900,000\text{₦}900,000. Depreciation on existing vehicles is calculated on net book value (20%×[₦2,000,000−₦600,000]=₦280,00020\% \times [\text{₦}2,000,000 - \text{₦}600,000] = \text{₦}280,000). Pro-rata depreciation for the new vehicle owned for 6 months is 20%×₦900,000×612=₦90,00020\% \times \text{₦}900,000 \times \frac{6}{12} = \text{₦}90,000. Adding both yields ₦370,000\text{₦}370,000.

Step-by-Step Solution

1
Determine the correct capital cost of the new vehicle
Capital Cost = ₦800,000+₦100,000=₦900,000\text{₦}800,000 + \text{₦}100,000 = \text{₦}900,000
All incidental costs incurred to bring a non-current asset into location and condition for operational use must be capitalized.
2
Calculate depreciation on existing motor vehicles for the full year
Net Book Value at start = ₦2,000,000−₦600,000=₦1,400,000\text{₦}2,000,000 - \text{₦}600,000 = \text{₦}1,400,000. Depreciation = 20%×₦1,400,000=₦280,00020\% \times \text{₦}1,400,000 = \text{₦}280,000
Under the reducing balance method, depreciation is applied to net book value (cost minus accumulated depreciation).
3
Calculate pro-rata depreciation on the new vehicle from 1st July to 31st December (6 months)
Depreciation = 20%×₦900,000×612=₦90,00020\% \times \text{₦}900,000 \times \frac{6}{12} = \text{₦}90,000
Pro-rata time basis requires charging depreciation only for the months the asset was owned in the financial year.
4
Sum total depreciation for the Profit and Loss Account
Total Depreciation = ₦280,000+₦90,000=₦370,000\text{₦}280,000 + \text{₦}90,000 = \text{₦}370,000
Total annual depreciation consists of depreciation on existing assets plus depreciation on additions.

Key Concept

Adjustment for depreciation using the reducing balance method with capital expenditure adjustment and pro-rata time apportionment.
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Topics

Adjustments for Depreciation of Fixed Assets

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