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Difficulty: HardAdjustments for Depreciation of Fixed Assets

The following trial balance extract was taken from the books of a sole trader as at 31st December 2024:

AccountDebit (₦\text{₦})Credit (₦\text{₦})
Motor Vehicles (at cost)2,400,0002,400,000
Provision for Depreciation on Motor Vehicles (1st January 2024)600,000600,000

Additional information:
- On 1st July 2024, a new delivery van costing ₦800,000\text{₦}800,000 was purchased on credit. This transaction was mistakenly recorded in the Purchases Journal.
- Depreciation is to be charged at 20%20\% per annum using the reducing balance method, calculated pro-rata for assets acquired during the year.

What is the total depreciation expense for motor vehicles to be charged to the Profit and Loss Account for the year ended 31st December 2024?

  1. ₦440,000\text{₦}440,000Answer
  2. B
    ₦360,000\text{₦}360,000
  3. C
    ₦520,000\text{₦}520,000
  4. D
    ₦640,000\text{₦}640,000

Answer

The total depreciation expense to be charged to the Profit and Loss Account is ₦440,000\text{₦}440,000.
The total depreciation expense of ₦440,000\text{₦}440,000 combines ₦360,000\text{₦}360,000 (reducing balance depreciation on existing motor vehicles based on net book value of ₦1,800,000\text{₦}1,800,000) and ₦80,000\text{₦}80,000 (pro-rata depreciation for 6 months on the newly capitalized delivery van of ₦800,000\text{₦}800,000).

Step-by-Step Solution

1
Adjust motor vehicles cost for capital expenditure misclassification
Corrected Motor Vehicles Cost = ₦2,400,000+₦800,000=₦3,200,000\text{₦}2,400,000 + \text{₦}800,000 = \text{₦}3,200,000
Purchasing a fixed asset is a capital expenditure. Entering it in the Purchases Journal was an error that must be corrected by adding ₦800,000\text{₦}800,000 to Motor Vehicles.
2
Calculate depreciation on existing motor vehicles using the reducing balance method
Net Book Value of existing vehicles = ₦2,400,000−₦600,000=₦1,800,000\text{₦}2,400,000 - \text{₦}600,000 = \text{₦}1,800,000.
Depreciation = 20%×₦1,800,000=₦360,00020\% \times \text{₦}1,800,000 = \text{₦}360,000
The reducing balance method computes depreciation as a percentage of the Net Book Value (Cost minus Accumulated Depreciation at the start of the year).
3
Calculate pro-rata depreciation for the new vehicle acquired on 1st July 2024
Pro-rata Depreciation = 20%×₦800,000×612=₦80,00020\% \times \text{₦}800,000 \times \frac{6}{12} = \text{₦}80,000
The asset was owned for 6 months (July to December), so depreciation is apportioned for half a year.
4
Sum the total depreciation expense for the year
Total Depreciation = ₦360,000+₦80,000=₦440,000\text{₦}360,000 + \text{₦}80,000 = \text{₦}440,000
Both charges combine to form the total depreciation expense debited to the Profit and Loss Account.

Key Concept

Adjustments for Depreciation of Fixed Assets using Reducing Balance Method and Pro-Rata Apportionment
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Topics

Adjustments for Depreciation of Fixed Assets

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