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Difficulty: MediumAccounting Treatment of Depreciation and Provision for Depreciation

On 1 January 2024, Aba Commercial Ventures had a Machinery account balance at cost of ₦8,000,000₦8,000,000 and a Provision for Depreciation on Machinery credit balance of ₦1,200,000₦1,200,000. Depreciation is charged annually at 15%15\% using the reducing balance method. What is the total balance of the Provision for Depreciation on Machinery account to be carried forward as at 31 December 2024?

Answer: 2220000 ₦

Answer

The total balance of the Provision for Depreciation on Machinery account as at 31 December 2024 is ₦2,220,000₦2,220,000.
To determine the closing Provision for Depreciation balance on 31 December 2024 under the reducing balance method, first compute the opening net book value by subtracting opening provision from cost (₦8,000,000−₦1,200,000=₦6,800,000₦8,000,000 - ₦1,200,000 = ₦6,800,000). Next, calculate the 2024 depreciation charge of 15%15\% on ₦6,800,000₦6,800,000, which equals ₦1,020,000₦1,020,000. Finally, add this current charge to the opening provision of ₦1,200,000₦1,200,000 to obtain the closing balance of ₦2,220,000₦2,220,000.

Step-by-Step Solution

1
Determine the opening net book value of the machinery on 1 January 2024.
Net Book Value = ₦8,000,000−₦1,200,000=₦6,800,000₦8,000,000 - ₦1,200,000 = ₦6,800,000.
Under the reducing balance method, annual depreciation is calculated on the net book value (Cost minus Accumulated Depreciation) at the start of the period.
2
Calculate the current year's depreciation charge for 2024.
Depreciation for 2024 = 15%×₦6,800,000=₦1,020,00015\% \times ₦6,800,000 = ₦1,020,000.
Applying the fixed rate of 15%15\% to the net book value yields the annual provision expense.
3
Determine the accumulated Provision for Depreciation balance at year-end.
Closing Provision = ₦1,200,000+₦1,020,000=₦2,220,000₦1,200,000 + ₦1,020,000 = ₦2,220,000.
The provision for depreciation account accumulates total depreciation over time, so the current year expense is added to the opening balance.

Key Concept

Accounting Treatment of Provision for Depreciation under the Reducing Balance Method
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Topics

Accounting Treatment of Depreciation and Provision for Depreciation

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