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Difficulty: HardAccounting Treatment of Depreciation and Provision for Depreciation

On 1 January 2022, Zenith Manufacturing Enterprise purchased office equipment for ₦8,000,000₦8,000,000. The firm computes depreciation at a rate of 25%25\% per annum using the reducing balance method. If accounts are prepared annually to 31 December, which double entry correctly records the depreciation expense for the year ended 31 December 2024, and what is the accumulated balance in the Provision for Depreciation Account as at that date?

  1. Debit Profit and Loss Account with ₦1,125,000₦1,125,000 and Credit Provision for Depreciation Account with ₦1,125,000₦1,125,000; Closing Provision for Depreciation balance is ₦4,625,000₦4,625,000Answer
  2. B
    Debit Profit and Loss Account with ₦2,000,000₦2,000,000 and Credit Provision for Depreciation Account with ₦2,000,000₦2,000,000; Closing Provision for Depreciation balance is ₦6,000,000₦6,000,000
  3. C
    Debit Provision for Depreciation Account with ₦1,125,000₦1,125,000 and Credit Profit and Loss Account with ₦1,125,000₦1,125,000; Closing Provision for Depreciation balance is ₦4,625,000₦4,625,000
  4. D
    Debit Profit and Loss Account with ₦1,125,000₦1,125,000 and Credit Office Equipment Account with ₦1,125,000₦1,125,000; Closing Provision for Depreciation balance is ₦1,125,000₦1,125,000

Answer

Debit Profit and Loss Account with ₦1,125,000₦1,125,000 and Credit Provision for Depreciation Account with ₦1,125,000₦1,125,000; Closing Provision for Depreciation balance is ₦4,625,000₦4,625,000
The correct answer properly applies the reducing balance depreciation formula across all three years. In 2022, depreciation is ₦2,000,000₦2,000,000, leaving an NBV of ₦6,000,000₦6,000,000. In 2023, depreciation is ₦1,500,000₦1,500,000, leaving an NBV of ₦4,500,000₦4,500,000. In 2024, depreciation is 25%25\% of ₦4,500,000=₦1,125,000₦4,500,000 = ₦1,125,000. To record annual depreciation, the Profit and Loss Account is debited (expense) and the Provision for Depreciation Account is credited (contra-asset). Total accumulated provision at 31 December 2024 is ₦2,000,000+₦1,500,000+₦1,125,000=₦4,625,000₦2,000,000 + ₦1,500,000 + ₦1,125,000 = ₦4,625,000.

Step-by-Step Solution

1
Calculate Year 1 (2022) depreciation expense and Net Book Value (NBV) at end of 2022
Year 1 Depreciation = 25%×₦8,000,000=₦2,000,00025\% \times ₦8,000,000 = ₦2,000,000. NBV at end of 2022 = ₦8,000,000−₦2,000,000=₦6,000,000₦8,000,000 - ₦2,000,000 = ₦6,000,000.
Under the reducing balance method, the first year depreciation is calculated on original cost.
2
Calculate Year 2 (2023) depreciation expense and NBV at end of 2023
Year 2 Depreciation = 25%×₦6,000,000=₦1,500,00025\% \times ₦6,000,000 = ₦1,500,000. Accumulated Depreciation end of 2023 = ₦2,000,000+₦1,500,000=₦3,500,000₦2,000,000 + ₦1,500,000 = ₦3,500,000. NBV at end of 2023 = ₦8,000,000−₦3,500,000=₦4,500,000₦8,000,000 - ₦3,500,000 = ₦4,500,000.
Depreciation in Year 2 is based on the reduced net book value at the beginning of 2023.
3
Calculate Year 3 (2024) depreciation expense and closing Provision for Depreciation balance
Year 3 Depreciation = 25%×₦4,500,000=₦1,125,00025\% \times ₦4,500,000 = ₦1,125,000. Closing Provision for Depreciation balance = ₦3,500,000+₦1,125,000=₦4,625,000₦3,500,000 + ₦1,125,000 = ₦4,625,000.
Year 3 depreciation charge is calculated on the NBV at the start of 2024 (₦4,500,000₦4,500,000). The closing provision accumulates all three years of depreciation.
4
Determine the correct double entry posting
Debit Profit and Loss Account with ₦1,125,000₦1,125,000 and Credit Provision for Depreciation Account with ₦1,125,000₦1,125,000.
Depreciation is an expense (debited to P&L Account) and increases the accumulated allowance liability/contra-asset (credited to Provision for Depreciation Account).

Key Concept

Accounting Treatment of Reducing Balance Depreciation and Provision Account
Estimated Time:2m 0s
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Topics

Accounting Treatment of Depreciation and Provision for Depreciation

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