Examkin

Question

Difficulty: MediumAccounting Treatment of Depreciation and Provision for Depreciation

On 1 January 2023, Ibadan Logistics Enterprise acquired plant machinery costing ₦10,000,000₦10,000,000. The policy of the enterprise is to provide for depreciation at a rate of 20%20\% per annum using the reducing balance method. Calculate the credit balance of the Provision for Depreciation Account as at 31 December 2024.

Answer: 3600000 ₦

Answer

The credit balance of the Provision for Depreciation Account as at 31 December 2024 is ₦3,600,000.
The Provision for Depreciation Account represents the cumulative total of all depreciation charged against an asset. For 2023, the depreciation is 20%20\% of ₦10,000,000=₦2,000,000₦10,000,000 = ₦2,000,000. For 2024, using the reducing balance method, the charge is 20%20\% of (₦10,000,000−₦2,000,000)=₦1,600,000(₦10,000,000 - ₦2,000,000) = ₦1,600,000. Adding these two charges yields a total credit balance of ₦3,600,000₦3,600,000 as at 31 December 2024.

Step-by-Step Solution

1
Calculate depreciation for Year 1 (2023)
₦2,000,000
Depreciation under reducing balance in the first year is based on initial cost: 20%×₦10,000,000=₦2,000,00020\% \times ₦10,000,000 = ₦2,000,000.
2
Determine Net Book Value at the end of Year 1
₦8,000,000
Net Book Value is Cost minus Accumulated Depreciation: ₦10,000,000−₦2,000,000=₦8,000,000₦10,000,000 - ₦2,000,000 = ₦8,000,000.
3
Calculate depreciation for Year 2 (2024)
₦1,600,000
Depreciation in Year 2 applies the rate to the reduced book value: 20%×₦8,000,000=₦1,600,00020\% \times ₦8,000,000 = ₦1,600,000.
4
Sum total provision for depreciation through 31 December 2024
₦3,600,000
The Provision for Depreciation Account accumulates total depreciation charged across all years (₦2,000,000+₦1,600,000=₦3,600,000₦2,000,000 + ₦1,600,000 = ₦3,600,000).

Key Concept

Accounting Treatment of Provision for Depreciation using Reducing Balance Method
Rate this question

Topics

Accounting Treatment of Depreciation and Provision for Depreciation

More questions from this topic