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Difficulty: Very hardAccounting Treatment of Depreciation and Provision for Depreciation

The trial balance of Danladi Commercial Enterprise as at 31 December 2025 showed Motor Vehicles at cost of ₦15,000,000₦15,000,000 and Provision for Depreciation on Motor Vehicles of ₦5,400,000₦5,400,000.

On 30 June 2025, a vehicle that had been purchased on 1 January 2023 for ₦3,000,000₦3,000,000 was sold for ₦1,600,000₦1,600,000.

The policy of the enterprise is to provide depreciation on motor vehicles at 20%20\% per annum using the reducing balance method, charging a full year's depreciation in the year of purchase and no depreciation in the year of disposal.

What is the balance of the Provision for Depreciation on Motor Vehicles Account to be presented in the Statement of Financial Position as at 31 December 2025?

  1. ₦5,856,000Answer
  2. B
    ₦5,640,000
  3. C
    ₦6,600,000
  4. D
    ₦6,936,000

Answer

The correct balance of the Provision for Depreciation on Motor Vehicles Account as at 31 December 2025 is ₦5,856,000.
The correct balance of ₦5,856,000 is derived by first removing the ₦1,080,000 accumulated depreciation of the sold vehicle from the opening provision of ₦5,400,000, leaving ₦4,320,000. Next, the net book value of the remaining vehicles (₦12,000,000 cost minus ₦4,320,000 accumulated depreciation) is ₦7,680,000. Applying the 20% reducing balance rate yields a current year depreciation charge of ₦1,536,000. Adding this charge to ₦4,320,000 gives a closing provision balance of ₦5,856,000.

Step-by-Step Solution

1
Calculate accumulated depreciation on the disposed vehicle up to 31 December 2024
Year 2023 depreciation = 20%×₦3,000,000=₦600,00020\% \times ₦3,000,000 = ₦600,000 (Net Book Value = ₦2,400,000₦2,400,000). Year 2024 depreciation = 20%×₦2,400,000=₦480,00020\% \times ₦2,400,000 = ₦480,000. Total accumulated depreciation on disposed vehicle = ₦600,000+₦480,000=₦1,080,000₦600,000 + ₦480,000 = ₦1,080,000.
Because no depreciation is charged in the year of disposal, accumulated depreciation covers only 2023 and 2024.
2
Remove the accumulated depreciation of the disposed vehicle from the opening provision
Remaining opening provision balance = ₦5,400,000−₦1,080,000=₦4,320,000₦5,400,000 - ₦1,080,000 = ₦4,320,000.
When an asset is sold, its total accumulated depreciation must be debited to the Provision for Depreciation Account and credited to the Asset Disposal Account.
3
Determine the Net Book Value (NBV) of remaining vehicles at 1 January 2025
Cost of remaining vehicles = ₦15,000,000−₦3,000,000=₦12,000,000₦15,000,000 - ₦3,000,000 = ₦12,000,000. NBV of remaining vehicles = ₦12,000,000−₦4,320,000=₦7,680,000₦12,000,000 - ₦4,320,000 = ₦7,680,000.
Depreciation under the reducing balance method must be calculated on the net book value of active assets at the start of the accounting period.
4
Calculate 2025 depreciation expense and closing provision balance
Depreciation for 2025 = 20%×₦7,680,000=₦1,536,00020\% \times ₦7,680,000 = ₦1,536,000. Closing Provision for Depreciation = ₦4,320,000+₦1,536,000=₦5,856,000₦4,320,000 + ₦1,536,000 = ₦5,856,000.
The current year's depreciation is credited to the Provision for Depreciation Account to yield the updated closing balance.

Key Concept

Accounting Treatment of Asset Disposal and Provision for Depreciation under Reducing Balance Method
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Topics

Accounting Treatment of Depreciation and Provision for Depreciation

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