Examkin

Question

Difficulty: MediumAdjustments for Depreciation of Fixed Assets

Read the scenario below regarding the fixed assets of a sole trader and calculate the required financial values to complete the statement.

Answer:On 1 January 2025, a sole trader held Delivery Vans with a total cost of ₦2,000,000\text{₦}2,000,000 and accumulated depreciation of ₦600,000\text{₦}600,000. On 1 April 2025, an additional delivery van was purchased for ₦800,000\text{₦}800,000. Depreciation is provided at 20%20\% per annum on cost using the straight-line method, calculated on a pro-rata basis for additions during the year.

The total depreciation charge to be debited to the Profit and Loss Account for the year ended 31 December 2025 is ₦\text{₦}【520,000】, while the Net Book Value of Delivery Vans presented in the Balance Sheet as at 31 December 2025 is ₦\text{₦}【1,680,000】.

Answer

The depreciation charge to be debited to the Profit and Loss Account is ₦520,000, and the Net Book Value to be presented in the Balance Sheet is ₦1,680,000.
For the financial year ended 31 December 2025, the existing delivery vans generate ₦400,000 in depreciation (20% of ₦2,000,000) and the new van acquired on 1 April generates ₦120,000 (20% of ₦800,000 × 9/12). Combining these gives a total P&L depreciation charge of ₦520,000. In the Balance Sheet, total cost (₦2,800,000) minus total accumulated depreciation (₦600,000 prior + ₦520,000 current = ₦1,120,000) results in a Net Book Value of ₦1,680,000.

Step-by-Step Solution

1
Calculate full-year depreciation on the existing delivery vans held from the start of the year.
Depreciation on existing vans = 20%×₦2,000,000=₦400,00020\% \times \text{₦}2,000,000 = \text{₦}400,000.
Existing assets were in use for the full 12-month period.
2
Calculate pro-rata depreciation on the new delivery van acquired on 1 April 2025.
Depreciation on new van = 20%×₦800,000×912=₦120,00020\% \times \text{₦}800,000 \times \frac{9}{12} = \text{₦}120,000.
The new van was owned and used for 9 months during the financial year (1 April to 31 December).
3
Calculate total annual depreciation charge for the Profit and Loss Account (blank_1).
Total Depreciation Expense = ₦400,000+₦120,000=₦520,000\text{₦}400,000 + \text{₦}120,000 = \text{₦}520,000.
The total P&L adjustment is the sum of depreciation on existing assets and additions during the year.
4
Calculate total cost and accumulated depreciation as at 31 December 2025.
Total Cost = ₦2,000,000+₦800,000=₦2,800,000\text{₦}2,000,000 + \text{₦}800,000 = \text{₦}2,800,000. Total Accumulated Depreciation = ₦600,000+₦520,000=₦1,120,000\text{₦}600,000 + \text{₦}520,000 = \text{₦}1,120,000.
Total cost includes initial asset cost plus new purchases, and accumulated depreciation combines opening balance with current year expense.
5
Determine the Net Book Value (NBV) for the Balance Sheet (blank_2).
Net Book Value = ₦2,800,000−₦1,120,000=₦1,680,000\text{₦}2,800,000 - \text{₦}1,120,000 = \text{₦}1,680,000.
Net Book Value is calculated as Total Cost minus Accumulated Depreciation.

Key Concept

Adjustments for Depreciation of Fixed Assets
Estimated Time:1m 30s
Rate this question

Topics

Adjustments for Depreciation of Fixed Assets

More questions from this topic