Examkin

Question

Difficulty: MediumDepreciation Methods and Calculations

On 1 July 2023, Apex Logistics purchased a industrial generator for ₦1,800,000₦1,800,000. Additional installation costs of ₦200,000₦200,000 were incurred and paid on the same day. The business prepares its financial statements annually on 31 December. If depreciation is provided at 20%20\% per annum using the straight-line method, what is the net book value of the generator as at 31 December 2024?

  1. ₦1,400,000₦1,400,000Answer
  2. B
    ₦1,200,000₦1,200,000
  3. C
    ₦1,260,000₦1,260,000
  4. D
    ₦1,600,000₦1,600,000

Answer

The net book value of the generator as at 31 December 2024 is ₦1,400,000₦1,400,000.
The total cost of the asset includes both purchase price (₦1,800,000₦1,800,000) and installation cost (₦2,000,000₦2,000,000 total). Straight-line depreciation yields an annual rate of ₦400,000₦400,000. For 2023, 6 months of depreciation equals ₦200,000₦200,000. For 2024, a full year's depreciation is ₦400,000₦400,000. Total accumulated depreciation is ₦600,000₦600,000, leaving a net book value of ₦1,400,000₦1,400,000.

Step-by-Step Solution

1
Determine total capitalized cost of asset
Total Cost=₦1,800,000+₦200,000=₦2,000,000\text{Total Cost} = ₦1,800,000 + ₦200,000 = ₦2,000,000
Capital expenditure necessary to bring the fixed asset into usable condition (installation cost) must be added to the purchase price.
2
Calculate full annual depreciation charge
Annual Depreciation=20%×₦2,000,000=₦400,000\text{Annual Depreciation} = 20\% \times ₦2,000,000 = ₦400,000
Under the straight-line method, depreciation is computed as a fixed percentage of total historical cost.
3
Calculate prorated depreciation for the year 2023 (1 July to 31 December = 6 months)
Depreciation2023=₦400,000×612=��200,000\text{Depreciation}_{2023} = ₦400,000 \times \frac{6}{12} = ��200,000
Assets acquired during the accounting year generate depreciation expense proportional to the number of months owned.
4
Calculate depreciation for the year 2024 (1 full year)
Depreciation2024=₦400,000\text{Depreciation}_{2024} = ₦400,000
The generator was held for the entire 12-month accounting period in 2024.
5
Calculate net book value at 31 December 2024
Net Book Value=₦2,000,000−(₦200,000+₦400,000)=₦1,400,000\text{Net Book Value} = ₦2,000,000 - (₦200,000 + ₦400,000) = ₦1,400,000
Net book value equals total cost minus total accumulated depreciation.

Key Concept

Straight-line depreciation with mid-year acquisition and capital expenditure capitalization
Rate this question

Topics

Depreciation Methods and Calculations

More questions from this topic