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Difficulty: HardAdjustments for Depreciation of Fixed Assets

A sole trader purchased plant machinery on 1st January 2023 for ₦1,200,000\text{₦}1,200,000. On 1st July 2025, routine repairs to the machinery costing ₦200,000\text{₦}200,000 were erroneously debited to the Plant Machinery Account. Depreciation is provided at 20%20\% per annum using the reducing balance method. What is the correct depreciation expense to be charged to the Profit and Loss Account for the year ended 31st December 2025?

  1. ₦153,600\text{₦}153,600Answer
  2. B
    ₦173,600\text{₦}173,600
  3. C
    ₦193,600\text{₦}193,600
  4. D
    ₦240,000\text{₦}240,000

Answer

The correct depreciation charge to the Profit and Loss Account for the year ended 31st December 2025 is ₦153,600\text{₦}153,600.
The correct answer is ₦153,600\text{₦}153,600. Routine repairs are revenue expenditure and should be debited directly to the Profit and Loss Account, not capitalized into the Plant Machinery Account. Therefore, the asset's opening carrying value for 2025 remains ₦768,000\text{₦}768,000 (₦1,200,000−₦240,000−₦192,000\text{₦}1,200,000 - \text{₦}240,000 - \text{₦}192,000). Applying the 20%20\% reducing balance depreciation rate yields ₦153,600\text{₦}153,600.

Step-by-Step Solution

1
Calculate Net Book Value (NBV) at the end of 2023
Depreciation for 2023 = 20%×₦1,200,000=₦240,00020\% \times \text{₦}1,200,000 = \text{₦}240,000. NBV at 31/12/2023 = ₦1,200,000−₦240,000=₦960,000\text{₦}1,200,000 - \text{₦}240,000 = \text{₦}960,000.
Reducing balance method requires applying the percentage rate to the carrying value at the beginning of each period.
2
Calculate Net Book Value (NBV) at the end of 2024
Depreciation for 2024 = 20%×₦960,000=₦192,00020\% \times \text{₦}960,000 = \text{₦}192,000. NBV at 31/12/2024 = ₦960,000−₦192,000=₦768,000\text{₦}960,000 - \text{₦}192,000 = \text{₦}768,000.
This establishes the correct opening carrying value for the 2025 financial year.
3
Adjust asset account for revenue expenditure misclassification
The ₦200,000\text{₦}200,000 spent on routine repairs is a revenue expense (credited to Cash/Bank, debited to Repairs Account) and must NOT be added to the Plant Machinery Account.
Capitalizing revenue expenditure violates accounting concepts and inflates asset values.
4
Compute correct 2025 depreciation charge
Depreciation for 2025 = 20%×₦768,000=₦153,60020\% \times \text{₦}768,000 = \text{₦}153,600.
The rate is applied strictly to the corrected carrying value of the asset.

Key Concept

Depreciation under Reducing Balance Method with Adjustment for Misclassified Revenue Expenditure
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Topics

Adjustments for Depreciation of Fixed Assets

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