Theory question 105
DepreciationAbu Enterprise bought a computer for D 200,000 on 1st January 2021. The scrap value was estimated at D 40,000 with an expected lifespan of 8 years. It was later sold on 31st December 2024 for D 133,000.
You are required to prepare: (a) Computer Account; (b) Provision for Depreciation Account; (c) Computer Disposal Account; (d) Profit and Loss Account Extract.
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Annual depreciation (straight line) = (200,000 − 40,000) ÷ 8 = D 20,000.
(a) Computer Account: Dr 1/1/2021 Bank 200,000; balance c/d each year 200,000; 31/12/2024 Cr Disposal 200,000.
(b) Provision for Depreciation Account: Cr 31/12/2021 P&L 20,000 (bal c/d 20,000); 2022 P&L 20,000 (bal 40,000); 2023 P&L 20,000 (bal 60,000); 2024 P&L 20,000 (total 80,000); 31/12/2024 Dr Disposal 80,000.
(c) Computer Disposal Account: Dr Computer 200,000; Dr P&L (profit on disposal) 13,000 = 213,000 | Cr Provision for depreciation 80,000; Cr Bank 133,000 = 213,000.
(Net book value 200,000 − 80,000 = 120,000; proceeds 133,000; profit D 13,000.)
(d) Profit and Loss Account (extract), years ended 31 December: Depreciation of computer D 20,000 in each of 2021, 2022, 2023 and 2024; 2024 profit on disposal of computer D 13,000 (credit/added).
Depreciation is 20,000 a year; four years give 80,000, so the computer's book value at sale is 120,000.