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Difficulty: MediumDepreciation Methods and Calculations

Ade & Sons purchased a delivery van on 1 April 2023 for ₦2,000,000₦2,000,000. The firm depreciates its motor vehicles using the reducing balance method at the rate of 20%20\% per annum. The financial year of the business ends on 31 December each year. What is the total accumulated depreciation on the delivery van as of 31 December 2024?

Answer: 640000 ₦

Answer

The total accumulated depreciation as of 31 December 2024 is ₦640,000.
For the financial year ended 31 December 2023, the van was used for 9 months (April 1 to December 31). Depreciation for 2023 is 20%×₦2,000,000×912=₦300,00020\% \times ₦2,000,000 \times \frac{9}{12} = ₦300,000. The net book value as of 31 December 2023 becomes ₦2,000,000−₦300,000=₦1,700,000₦2,000,000 - ₦300,000 = ₦1,700,000. For 2024, depreciation using the reducing balance method is 20%×₦1,700,000=₦340,00020\% \times ₦1,700,000 = ₦340,000. The total accumulated depreciation as of 31 December 2024 is the sum of both years' depreciation charges: ₦300,000+₦340,000=₦640,000₦300,000 + ₦340,000 = ₦640,000.

Step-by-Step Solution

1
Determine the time proportion and calculate depreciation for the first year (2023)
₦300,000
The asset was bought on 1 April 2023, so depreciation is charged for only 9 months in 2023: 20%×₦2,000,000×912=₦300,00020\% \times ₦2,000,000 \times \frac{9}{12} = ₦300,000.
2
Calculate net book value (NBV) at the end of 2023
₦1,700,000
Under reducing balance method, future depreciation applies to the net book value (₦2,000,000−₦300,000=₦1,700,000₦2,000,000 - ₦300,000 = ₦1,700,000).
3
Calculate depreciation for the second year (2024)
���340,000
Depreciation for a full year on reducing balance: 20%×₦1,700,000=₦340,00020\% \times ₦1,700,000 = ₦340,000.
4
Sum depreciation for both years to get accumulated depreciation at 31 December 2024
₦640,000
Accumulated depreciation is the aggregate of all yearly depreciation charges (₦300,000+₦340,000=₦640,000₦300,000 + ₦340,000 = ₦640,000).

Key Concept

Reducing balance depreciation method with proportionate mid-year calculation
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Topics

Depreciation Methods and Calculations

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