On 1 January 2017, a trader acquired a 3 years lease for * 60,000. It was decided to make a provision for the replacement of the lease by means of a sinking fund. The rate of investment was 5% p.a. The sinking fund table shows that to provide the requisite sum at 5% at the end of three years, an investment of 18,100 is required every year. At the end of the third year investments realised ? 41,000. Prepare Lease Account, Sinking Fund Account and Sinking Fund Investment Account.
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Under sinking fund method, depreciation charged is invested in outside securities at the end of the first year. Interest is earned during the second year and the first entry for investment of interest is made at the end of the year. Amount of depreciation is calculated with the help of sinking fund tables and hence depreciation fund method is also known as sinking fund method.
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