Example problem on sinking fund method of depreciation
Example problem on sinking fund method of depreciation -1
A
company has purchased an equipment whose first cost is Rs. 1,00,000 with an
estimated life of eight years. The estimated salvage value of the equipment at
the end of its lifetime is Rs. 20,000. Determine the depreciation charge and
book value at the end of various years using the sinking fund method of
depreciation with an interest rate of 12%, compounded annually.
Given data
Purchase
price, P = ₹. 1,00,000
Salvage
value, F = ₹. 20,000
Life
of an asset, n = 8 years
i
= 12%
Formula used
A
= (P-F) * (A/F,i,n)
Dt
= (P-F) * (A/F,i,n) * (F/P,i,t-1)
Bt =
Bt–1 – Dt
Solution
End of Year
|
Annual fixed depreciation
A = (P-F) * (A/F,i,n)
in ₹
|
Depreciation [Dt = (P-F) * (A/F,i,n) *
(F/P,i,t-1)]
in ₹
|
Book Value
(Bt = Bt–1 –
Dt)
in ₹
|
0
|
6,504
|
1,00,000
|
|
1
|
6,504
|
(1,00,000-20,000) *
(A/F,12%,8) * (F/P,12%,0) =
(80,000) * (0.0813)
* (1) = 6,504
|
93,496.00
|
2
|
6,504
|
(1,00,000-20,000) *
(A/F,12%,8) * (F/P,12%,1) = (80,000) * (0.0813) * (1.120) = 7,284.48
|
86,211.52
|
3
|
6,504
|
(1,00,000-20,000) *
(A/F,12%,8) * (F/P,12%,2) = (80,000) * (0.0813) * (1.254) = 8,158.62
|
78,052.90
|
4
|
6,504
|
9,137.65
|
68,915.25
|
5
|
6,504
|
10,234.17
|
58,681.08
|
6
|
6,504
|
11,462.27
|
47,218.81
|
7
|
6,504
|
12,837.74
|
34,381.07
|
8
|
6,504
|
14,378.27
|
20,002.80
|
Example problem on sinking
fund method of depreciation -2
A
company has purchased an equipment whose first cost is Rs. 1,00,000 with an
estimated life of eight years. The estimated salvage value of the equipment at
the end of its lifetime is Rs. 20,000. Determine the depreciation charge at the
end of 5th and book value at the end of 7th year using the sinking fund method
of depreciation with an interest rate of 12% compounded annually.
Given data
Purchase
price, P = ₹. 1,00,000
Salvage
value, F = ₹. 20,000
Life
of an asset, n = 8 years
t1
= 5
t2
= 7
Formula used
Dt
= (P-F) * (A/F,i,n) * (F/P,i,t-1)
Bt
= P-[(P-F) * (A/F,i,n) * (F/A,i,t)]
Solution
D5 = (P-F) * (A/F,i,n) * (F/P,i,t-1)
= (1,00,000-20,000) * (A/F,12%,8) *
(F/P,12%,5-1)
= (1,00,000-20,000) * (A/F,12%,8) *
(F/P,12%,4)
= (80,000) * (0.0813) * (1.574)
D5 =₹. 10,237.30
B7 = P-[(P-F) * (A/F,i,n) * (F/A,i,t)]
= 1,00,000-[(1,00,000-20,000) *
(A/F,12%,7) * (F/A,12%,7)]
= 1,00,000-[(80,000) * (0.0813) *
(10.089)]
B7 =₹. 34,381.10
Result
At
the end of 5th year,
Depreciation charge = ₹. 10,237.30
At
the end of 7th year,
Book value = ₹. 34,381.10