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Difficulty: MediumAdjustments for Depreciation of Fixed Assets

The following information was extracted from the books of a sole trader for the year ended 31st December 2025:

- Office Equipment (at cost): ₦500,000\text{₦}500,000
- Accumulated Depreciation on Office Equipment (1st January 2025): ₦100,000\text{₦}100,000

On 1st July 2025, additional office equipment costing ₦200,000\text{₦}200,000 was purchased. Depreciation is to be charged at 20%20\% per annum using the reducing balance method, calculated on a pro-rata basis for additions.

What amount will be debited to the Profit and Loss Account as depreciation expense on office equipment for the year ended 31st December 2025?

  1. A
    ₦80,000\text{₦}80,000
  2. ₦100,000\text{₦}100,000Answer
  3. C
    ₦120,000\text{₦}120,000
  4. D
    ₦140,000\text{₦}140,000

Answer

The depreciation expense debited to the Profit and Loss Account is ₦100,000\text{₦}100,000.
The correct charge of ₦100,000\text{₦}100,000 is determined by adding the full-year reducing balance depreciation on existing equipment (20% of ₦400,000\text{₦}400,000 NBV = ₦80,000\text{₦}80,000) to the 6-month pro-rata depreciation on the new asset (20% of ₦200,000×6/12=₦20,000\text{₦}200,000 \times 6/12 = \text{₦}20,000).

Step-by-Step Solution

1
Calculate the net book value (NBV) of existing equipment at the beginning of the year.
NBV=Cost−Accumulated Depreciation=₦500,000−₦100,000=₦400,000\text{NBV} = \text{Cost} - \text{Accumulated Depreciation} = \text{₦}500,000 - \text{₦}100,000 = \text{₦}400,000
Under the reducing balance method, depreciation is calculated on the net book value rather than the original cost.
2
Compute full-year depreciation on the existing equipment.
\text{Depreciation} = 20\% \times \text{₦}400,000 = \text{₦}80,000
Existing equipment was used for the entire 12-month accounting period.
3
Compute pro-rata depreciation for the additional equipment acquired on 1st July 2025.
\text{Depreciation} = 20\% \times \text{₦}200,000 \times \frac{6}{12} = \text{₦}20,000
The new asset was owned for 6 months (1st July to 31st December).
4
Sum the depreciation amounts for total Profit and Loss Account debit.
\text{Total Depreciation Expense} = \text{₦}80,000 + \text{₦}20,000 = \text{₦}100,000
Total depreciation expense for the year combines existing assets and additions.

Key Concept

Reducing balance depreciation with pro-rata addition adjustment in final accounts
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Topics

Adjustments for Depreciation of Fixed Assets

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