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Difficulty: MediumAdjustments for Depreciation of Fixed Assets

A sole trader had Furniture and Fittings with an original cost of ₦500,000\text{₦}500,000 and accumulated depreciation of ₦100,000\text{₦}100,000 on 1st January 2025. On 1st July 2025, additional furniture costing ₦100,000\text{₦}100,000 was purchased. If depreciation is provided at 10%10\% per annum using the reducing balance method, what is the total depreciation expense to be charged to the Profit and Loss Account for the year ended 31st December 2025?

  1. ₦45,000\text{₦}45,000Answer
  2. B
    ₦50,000\text{₦}50,000
  3. C
    ₦55,000\text{₦}55,000
  4. D
    ₦40,000\text{₦}40,000

Answer

₦45,000\text{₦}45,000
Under the reducing balance method, depreciation for existing assets is calculated on the opening net book value (₦500,000−₦100,000=₦400,000\text{₦}500,000 - \text{₦}100,000 = \text{₦}400,000), yielding ₦40,000\text{₦}40,000. For the new addition acquired on 1st July 2025, depreciation is calculated pro-rata for 6 months (10%×₦100,000×612=₦5,00010\% \times \text{₦}100,000 \times \frac{6}{12} = \text{₦}5,000). Summing these yields a total Profit and Loss charge of ₦45,000\text{₦}45,000.

Step-by-Step Solution

1
Calculate the Net Book Value (NBV) of existing furniture at the start of the year.
Opening NBV = ₦500,000−₦100,000=₦400,000\text{₦}500,000 - \text{₦}100,000 = \text{₦}400,000
Under the reducing balance method, depreciation is computed on the net book value rather than original cost.
2
Calculate annual depreciation on existing furniture.
Depreciation = 10%×₦400,000=₦40,00010\% \times \text{₦}400,000 = \text{₦}40,000
The existing furniture was held for the full 12-month period.
3
Calculate pro-rata depreciation on the new furniture addition.
Depreciation = 10%×₦100,000×612=₦5,00010\% \times \text{₦}100,000 \times \frac{6}{12} = \text{₦}5,000
The addition was bought on 1st July 2025, so it was used for only 6 months of the financial year.
4
Sum the depreciation amounts for the total Profit and Loss Account expense.
Total Depreciation Charge = ₦40,000+₦5,000=₦45,000\text{₦}40,000 + \text{₦}5,000 = \text{₦}45,000
The total operating expense includes charges for both existing and newly acquired fixed assets.

Key Concept

Adjustments for Depreciation of Fixed Assets using Reducing Balance Method with Mid-Year Additions
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Topics

Adjustments for Depreciation of Fixed Assets

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