sinking fund method of depreciation sample problem with solution
Answers
Answer:
Step-by-step explanation:
Sinking Fund Method:
In Sinking Fund Method will provide us with an amount of depreciation as well as provide funds for the replacement of this asset when an asset need replacement like the end of life of an asset. Under this method, we charged depreciation on the value of asset but will not be credited to the asset account instead we will credit to sinking fund account. This account will be shown on the liabilities side of the Balance Sheet(Because it is a funds account) and an asset will be shown on the original value on the assets side of the Balance Sheet. At the end of each accounting year, the total amount of sinking fund credited in a year will be invested in the outside marketable security to provide cash for the replacement of an asset when needed.
It is also called Depreciation fund account.
*Interest received on marketable security will be invested likewise. So we to calculate the amount of depreciation is such way the amount of compound interest will be a sum equal to the cost of the asset less scrap value by the time it becomes useless.
*So, this amount will be calculated with the help of sinking fund table.
The formula of Calculation of Sinking Fund table value :
Depreciation formula of compound interest 2 - Sinking Fund Method of Depreciation | Example |
The following Table shows the Sinking Fund value period wise.
Period
1%
2%
3%
4%
5%
1 1.000000 1.000000 1.000000 1.000000 1.000000
2 0.497512 0.495050 0.492611 0.490196 0.487805
3 0.330022 0.326755 0.323530 0.320349 0.317209
4 0.246281 0.242624 0.239027 0.235490 0.232012
5 0.196040 0.192158 0.188355 0.184627 0.180975
6 0.162548 0.158526 0.154598 0.150762 0.147017
7 0.138628 0.134512 0.130506 0.126610 0.122820
8 0.120690 0.116510 0.112456 0.108528 0.104722
9 0.106740 0.102515 0.098434 0.094493 0.090690
10 0.095582 0.091327 0.087231 0.083291 0.079505
15 0.062124 0.057825 0.053767 0.049941 0.046342
20 0.045415 0.041157 0.037216 0.033582 0.030243
25 0.035407 0.031220 0.027428 0.024012 0.020952
30 0.028748 0.024650 0.021019 0.017830 0.015051
Journal Entries for Sinking Fund Method:
1st Year:
1) Asset A/c Dr ________
To Bank A/c ________
(Being asset purchased )
2) Depreciation A/c Dr ________
To Sinking Fund A/c ________
(Being dep. charged for the year)
3) Profit/loss A/c Dr. ________
To Depreciation A/c ________
(Being dep. of the year transferred to P/L A/c)
4) Sinking Fund Investment A/c Dr. ________
To Bank A/c ________
(Being amount of Dep. Invested in SFI A/c)
Subsequent Years: –
1) Bank A/c Dr. ________
To Sinking fund A/c ________
(Being Interest on Sinking fund investment account received for the year)
2) Depreciation A/c Dr. ________
To Sinking Fund A/c ________
(Being dep. charged for the year)
3) Profit/loss A/c Dr. ________
To Depreciation A/c ________
(Being dep. of the year transferred to P/L A/c)
4) Sinking Fund Investment A/c Dr. ________
To Bank A/c ________
(Being amount of Dep. plus interest on Sinking fund investment Invested in SFI A/c)
In Last Year: –
1) Bank A/c Dr. ________
To Sinking fund A/c ________
(Being Interest on Sinking fund investment account received for the year)
2) Depreciation A/c Dr. ________
To Sinking Fund A/c ________
(Being dep. charged for the year)
3) Profit/loss A/c Dr. ________
To Depreciation A/c ________
(Being dep. of the year transferred to P/L A/c)
4) Sinking Fund Investment A/c Dr. ________
To Bank A/c
5) Bank A/c Dr. ________
To Sinking fund Investment a/c ________
(Being invest sold at par means no profit no loss)
or
5) Bank A/c Dr. ________
Sinking Fund A/c Dr. ________
To Sinking fund Investment a/c ________
(Being invest sold at on loss)
or
5) Bank A/c Dr. ________
To Sinking fund Investment a/c ________
To Sinking Fund A/c ________
(Being invest sold at on profit)
6) Sinking Fund A/c Dr. ________
To Asset a/c ________
(Being balance of asset account transferred to Sinking fund account)
7) Sinking Fund A/c Dr. ________
To Profit/Loss a/c ________
(Being balance of Sinking fund account transferred to Profit and loss account – if profit)
Or
7) Profit/Loss A/c Dr. ________
To Sinking Fund a/c ________
(Being balance of Sinking fund account transferred to Profit and loss account – if Loss)
Example of sinking fund method of depreciation:
A and B Pvt. Ltd. purchase a machine on 01/04/2012 on lease for 4 years for Rs 10,00,000/-. It decided to provide cash for the replacement of the lease at the end of the 4th year by setting up a sinking fund. It is expected that investment will fetch interest @ 5%. The Sinking fund table shows that an annual payment of Re. 1 at 5% compound interest in 4 years is equal to 0.232012. Investment is made to the nearest rupee. At the end of the 4th year investment sold for Rs.7,50,000/-.