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Difficulty: MediumAccounting Treatment of Depreciation and Provision for Depreciation

On 1 January 2023, Calabar Haulage Enterprise purchased a delivery van for ₦6,000,000₦6,000,000. Depreciation is charged at 20%20\% per annum using the reducing balance method. What is the journal entry required to record the depreciation expense for the year ended 31 December 2024?

  1. Debit Profit and Loss Account ₦960,000₦960,000; Credit Provision for Depreciation Account ₦960,000₦960,000Answer
  2. B
    Debit Profit and Loss Account ₦1,200,000₦1,200,000; Credit Provision for Depreciation Account ₦1,200,000₦1,200,000
  3. C
    Debit Provision for Depreciation Account ₦960,000₦960,000; Credit Profit and Loss Account ₦960,000₦960,000
  4. D
    Debit Delivery Van Account ₦960,000₦960,000; Credit Profit and Loss Account ₦960,000₦960,000

Answer

Debit Profit and Loss Account ₦960,000₦960,000 and Credit Provision for Depreciation Account ₦960,000₦960,000
The correct answer properly applies the reducing balance depreciation method for the second year. Depreciation for 2023 was ₦1,200,000₦1,200,000, leaving a book value of ₦4,800,000₦4,800,000. For 2024, 20%20\% of ₦4,800,000₦4,800,000 yields ₦960,000₦960,000. To record this expense in the journal, the Profit and Loss Account is debited with ₦960,000₦960,000 and the Provision for Depreciation Account is credited with ₦960,000₦960,000.

Step-by-Step Solution

1
Calculate depreciation for Year 1 (2023)
Depreciation for 2023 = 20%×₦6,000,000=₦1,200,00020\% \times ₦6,000,000 = ₦1,200,000
In the first year of ownership, the reducing balance method applies the depreciation percentage to the initial cost.
2
Calculate the Net Book Value at the beginning of Year 2 (1 January 2024)
Net Book Value = ₦6,000,000−₦1,200,000=₦4,800,000₦6,000,000 - ₦1,200,000 = ₦4,800,000
Under the reducing balance method, annual depreciation is computed on the net book value (Cost minus Accumulated Depreciation).
3
Calculate depreciation for Year 2 (2024)
Depreciation for 2024 = 20%×₦4,800,000=₦960,00020\% \times ₦4,800,000 = ₦960,000
Applying the rate of 20%20\% to the updated net book value of ₦4,800,000₦4,800,000 gives the expense for 2024.
4
Determine the proper double-entry accounting treatment
Debit Profit and Loss Account ₦960,000₦960,000; Credit Provision for Depreciation Account ₦960,000₦960,000
Depreciation is an expense, so it is debited to the Profit and Loss Account and credited to the Provision for Depreciation Account to accumulate total depreciation.

Key Concept

Accounting Treatment of Depreciation under the Reducing Balance Method
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Topics

Accounting Treatment of Depreciation and Provision for Depreciation

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