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Difficulty: Very hardAdjustments for Depreciation of Fixed Assets

The following extract was taken from the trial balance of a sole trader as at 31st December 2025:

AccountDebit (₦)Credit (₦)
Machinery (at cost)800,000800,000
Provision for Depreciation on Machinery (1st Jan 2025)300,000300,000
Purchases1,500,0001,500,000

Additional Information:
1. On 1st July 2025, new machinery costing ₦200,000\text{₦}200,000 was purchased on credit and mistakenly entered in the Purchases Journal.
2. Depreciation is to be charged on machinery at 20%20\% per annum using the reducing balance method, calculated on a pro-rata basis for additions during the year.

What is the Net Book Value of Machinery to be shown in the Statement of Financial Position as at 31st December 2025?

  1. A
    ₦400,000\text{₦}400,000
  2. B
    ₦520,000\text{₦}520,000
  3. C
    ₦560,000\text{₦}560,000
  4. ₦580,000\text{₦}580,000Answer

Answer

The Net Book Value of Machinery in the Statement of Financial Position as at 31st December 2025 is ₦580,000\text{₦}580,000.
The correct answer of ₦580,000\text{₦}580,000 accounts for reclassifying ₦200,000\text{₦}200,000 capital expenditure into machinery cost (giving total cost of ₦1,000,000\text{₦}1,000,000), charging 20%20\% reducing balance depreciation on existing assets (₦100,000\text{₦}100,000), and 6 months pro-rata depreciation on new additions (₦20,000\text{₦}20,000), resulting in total accumulated depreciation of ₦420,000\text{₦}420,000.

Step-by-Step Solution

1
Correct the total cost of machinery at 31st December 2025
Total Cost = ₦800,000+₦200,000=₦1,000,000\text{₦}800,000 + \text{₦}200,000 = \text{₦}1,000,000
The purchase of machinery was erroneously posted to purchases, so it must be added back to the machinery cost account.
2
Calculate annual depreciation on existing machinery held for the full year
Opening Net Book Value = ₦800,000−₦300,000=₦500,000\text{₦}800,000 - \text{₦}300,000 = \text{₦}500,000. Depreciation = 20%×₦500,000=₦100,00020\% \times \text{₦}500,000 = \text{₦}100,000
The reducing balance method applies the rate to the Net Book Value at the beginning of the year.
3
Calculate pro-rata depreciation on new machinery acquired on 1st July 2025 (6 months)
Depreciation on new machinery = ₦200,000×20%×612=₦20,000\text{₦}200,000 \times 20\% \times \frac{6}{12} = \text{₦}20,000
The new asset was owned for 6 months (1st July to 31st December), requiring proportional depreciation.
4
Determine total accumulated depreciation and final Net Book Value
Total Accumulated Depreciation = ₦300,000+₦100,000+₦20,000=₦420,000\text{₦}300,000 + \text{₦}100,000 + \text{₦}20,000 = \text{₦}420,000. Net Book Value = ₦1,000,000−₦420,000=₦580,000\text{₦}1,000,000 - \text{₦}420,000 = \text{₦}580,000
Net Book Value is obtained by subtracting total accumulated depreciation from total corrected cost.

Key Concept

Depreciation Adjustments on Assets with Capital Expenditure Errors and Pro-rata Additions
Estimated Time:3m 0s
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Topics

Adjustments for Depreciation of Fixed Assets

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