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Difficulty: Very hardAdjustments for Depreciation of Fixed Assets

Calculate the required depreciation adjustment values for the sole trader's final accounts based on the information provided below.

Answer:A sole trader purchased a delivery van for ₦2,000,000\text{₦}2,000,000 on 1 July 2024. On 1 October 2025, an additional delivery van was purchased for ₦1,200,000\text{₦}1,200,000. Depreciation is charged at 20%20\% per annum using the reducing balance method, calculated on a pro-rata basis for partial months of ownership. The accounting year ends on 31 December.

The total depreciation expense debited to the Profit and Loss Account for the year ended 31 December 2025 is 【₦420,000】, and the Net Book Value of Motor Vehicles presented in the Balance Sheet as at 31 December 2025 is 【₦2,580,000】.

Answer

The total depreciation expense for the year ended 31 December 2025 is ₦420,000, and the Net Book Value of Motor Vehicles in the Balance Sheet as at 31 December 2025 is ₦2,580,000.
For the year ended 31 December 2025, depreciation on the first van is calculated at 20%20\% on its opening Net Book Value of ₦1,800,000\text{₦}1,800,000 (giving ₦360,000\text{₦}360,000), while depreciation on the second van purchased on 1 October 2025 is calculated pro-rata for 3 months on its cost of ₦1,200,000\text{₦}1,200,000 (giving ₦60,000\text{₦}60,000). The total P&L charge for 2025 is ₦420,000\text{₦}420,000. The Balance Sheet Net Book Value is total cost (₦3,200,000\text{₦}3,200,000) less total accumulated depreciation (₦620,000\text{₦}620,000), resulting in ₦2,580,000\text{₦}2,580,000.

Step-by-Step Solution

1
Calculate depreciation for the first van for the financial year 2024
Depreciation for 2024 (6 months from 1 July to 31 December) = ₦2,000,000×20%×612=₦200,000\text{₦}2,000,000 \times 20\% \times \frac{6}{12} = \text{₦}200,000. Net Book Value at 31 December 2024 = ₦2,000,000−₦200,000=₦1,800,000\text{₦}2,000,000 - \text{₦}200,000 = \text{₦}1,800,000.
Pro-rata depreciation must be calculated for partial year of purchase under the reducing balance method.
2
Calculate depreciation for the first van for the financial year 2025
Depreciation for 2025 = 20%×₦1,800,000=₦360,00020\% \times \text{₦}1,800,000 = \text{₦}360,000.
Reducing balance method applies the rate to the Net Book Value at the beginning of the financial year (1 January 2025).
3
Calculate pro-rata depreciation for the second van acquired during 2025
Depreciation for 2025 (3 months from 1 October to 31 December) = ₦1,200,000×20%×312=₦60,000\text{₦}1,200,000 \times 20\% \times \frac{3}{12} = \text{₦}60,000.
The second van was owned for only 3 months in 2025, requiring pro-rata computation on its cost.
4
Determine total P&L depreciation expense for 2025 and closing Net Book Value
Total 2025 Depreciation Charge = ₦360,000+₦60,000=₦420,000\text{₦}360,000 + \text{₦}60,000 = \text{₦}420,000. Total Cost of Vehicles = ₦2,000,000+₦1,200,000=₦3,200,000\text{₦}2,000,000 + \text{₦}1,200,000 = \text{₦}3,200,000. Total Accumulated Depreciation = ₦200,000+₦420,000=₦620,000\text{₦}200,000 + \text{₦}420,000 = \text{₦}620,000. Net Book Value as at 31 December 2025 = ₦3,200,000−₦620,000=₦2,580,000\text{₦}3,200,000 - \text{₦}620,000 = \text{₦}2,580,000.
P&L expense is the sum of depreciation charges for all assets for the current year, while Net Book Value reflects total cost less total accumulated depreciation up to the Balance Sheet date.

Key Concept

Reducing Balance Depreciation with Pro-Rata Adjustments for Additions
Estimated Time:3m 0s
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Topics

Adjustments for Depreciation of Fixed Assets

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