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Difficulty: HardAccounting Treatment of Depreciation and Provision for Depreciation

On 1st January 2021, Akins Commercial Enterprises purchased plant machinery for ₦4,000,000. Depreciation is charged at a rate of 20% per annum using the reducing balance method. What is the net book value of the machinery to be reported in the Statement of Financial Position as at 31st December 2023?

  1. ₦2,048,000Answer
  2. B
    ₦1,952,000
  3. C
    ₦1,600,000
  4. D
    ₦2,560,000

Answer

₦2,048,000
Under the reducing balance method, depreciation is computed on the net book value at the start of each accounting period. After deducting ₦800,000 in 2021, ₦640,000 in 2022, and ₦512,000 in 2023, total accumulated depreciation reaches ₦1,952,000. Subtracting this accumulated provision from the ₦4,000,000 historical cost leaves a net book value of ₦2,048,000 as at 31st December 2023.

Step-by-Step Solution

1
Calculate depreciation for Year 1 (2021)
Depreciation for 2021 = 20% of ₦4,000,000 = ₦800,000. Net Book Value at 31/12/2021 = ₦4,000,000 - ₦800,000 = ₦3,200,000.
In Year 1, reducing balance depreciation is calculated on original cost.
2
Calculate depreciation for Year 2 (2022)
Depreciation for 2022 = 20% of ₦3,200,000 = ₦640,000. Net Book Value at 31/12/2022 = ₦3,200,000 - ₦640,000 = ₦2,560,000.
Reducing balance method applies the percentage rate to the carrying amount (net book value) at the beginning of the period.
3
Calculate depreciation for Year 3 (2023)
Depreciation for 2023 = 20% of ₦2,560,000 = ₦512,000.
Apply the 20% rate to the net book value at the start of 2023.
4
Compute total accumulated depreciation and net book value as at 31st December 2023
Total Accumulated Depreciation = ₦800,000 + ₦640,000 + ₦512,000 = ₦1,952,000. Net Book Value at 31/12/2023 = ₦4,000,000 - ₦1,952,000 = ₦2,048,000.
Net Book Value equals historical cost minus total accumulated depreciation to date.

Key Concept

Accounting Treatment of Reducing Balance Depreciation
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Topics

Accounting Treatment of Depreciation and Provision for Depreciation

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