Accountancy, asked by rahulwhity123, 22 days ago

Under compound interest method of depreciation,

interest at 4% p.a. on the balance of the

depreciation fund account is charged to

Answers

Answered by teampandey4

Explanation:

You can use a sinking fund to pay off a loan in one lump sum at the end of a set amount of time while making just interest payments in the meantime. ... The interest to the lender is based on an annual rate of 12%. Using the simple interest formula, I = Prt, you have I = 10,000(0.12)(1) = 1,200 per year.

Answered by ravilaccs

Answer:

If the Compound Interest Method (really the Sinking Fund Method) was followed, every year interest at the rate of 4% per annum on the opening balance of the Depreciation Reserve had to be transferred from the Profit and Loss Account to the Depreciation Reserve Account.

Explanation:

When the cost of replacing an asset is too high, sinking fund methodology is used. Every year, depreciation is charged to the profit and loss account. However, it does occasionally happen that the money is not immediately available at the time of buying the new asset. So, the sinking fund approach is employed. This method involves transferring to the sinking fund account the annual depreciation charge. After that, this sum is put toward government securities. Additionally, these securities' interest earnings are reinvested.
After accounting for the element of interest, the annual depreciation charge is determined. The amount that is invested annually and remains invested for the duration of the asset's useful life will earn interest.
When an asset needs to be replaced, the investment is sold, and the proceeds are used to buy the new asset. The Sinking Fund Account is now debited for the book value of the outdated asset that needs to be replaced.
Sinking Fund Tables are used to calculate the annual amount of depreciation to be charged. These tables demonstrate how much money must be set aside over a specified period of time and at a specific rate of interest in order for it to total $1.
This method of accounting is complicated, though. Therefore, the amount accumulated in the sinking fund might not equal the asset's original purchase price as interest rates are subject to change.
Additionally, the price of replacing the outdated asset may increase or decrease over time. Large-scale industries with long-term assets and those with real estate assets and leases are the main users of this technique.

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