Sinking Fund Method Pdf

Sinking Fund Method of Depreciation

Formulas for the Sinking Fund Method of Depreciation

Sinking Fund Method of Depreciation

Calculate the amount of Depreciation or Investment. The denominator of the sinking fund formula represents the present value of an ordinary annuity, which is a series of equal payments made at the end of each period.

Give journal entries and prepare Debentures, Sinking fund and Sinking fund investment account for the three years. The amount to be credited to sinking fund is calculated with the help of Sinking Fund Table. Being Interest on Sinking fund investment account received for the year. We have written it here because this is the first step in solving sinking fund method-related questions. However, the method is appropriate in certain industries, such as regulated utilities, visor de archivos pdf gratis where the return on investment is fixed and the required long-lived assets are expensive.

All other entries are the same as already discussed earlier in the case of cumulative sinking funds. Investment is made to the nearest rupee. Being Depreciation on asset charged.

In the last year no amount is invested rather the investments are sold and debentures amount is refunded. Simultaneously with the appropriation, a like sum of money is invested in first class fixed income securities together with the interest received there from year by year. The face value and market price of securities may differ.

Calculation of amount of interest and the total amount of investment for each year end. Difference between Reserve Capital and Capital Reserve. In effect, this is the cost of the money needed for the sinking fund. 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.

Sinking Fund Method of Redemption of Debenture (Accounting Entries)

How to Find the Present Value

The sinking fund method is one of several advanced methods of depreciation that are more complex than the familiar straight-line and declining-balance methods. Until the debentures are paid off, the sinking fund appears in the liabilities side and the sinking fund investment on the assets side of the balance sheet. The above table shows that to get Re.

The result is that depreciation costs that rise over time, the opposite effect of the declining-balance methods. But the interest is always calculated on the face value of securities. Being land purchased on lease. Total Investment of the Year. Differences between Preference Shares and Equity Shares.

Under this method, Sinking Fund or Debenture Redemption Fund of an equal amount is created out of profits every year. However, the method allows a company to know how much money to sock away each year to pay for the eventual replacement of the asset. 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.

The formulas for this method require present value calculations. Care must be taken while transferring the sinking fund balance to General Reserve. Being amount of Sinking fund invested. The following Table shows the Sinking Fund value period wise. In the sinking fund method, also called the annuity method, companies add in an interest charge equal to the cost of a loan to pay for the asset.

It should be remembered that while making investment in sinking fund the amount of interest received and the yearly sinking fund installment are invested together. Profit or loss on sale of investments is transferred to sinking fund. You can see samples of his work at ericbank. 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. Being invest sold at par means no profit no loss.

Those sinking funds in which the interest income on sinking fund investment do not accumulate in the sinking fund but are transferred to Profit and Loss account. Being Amount of Lease written off by transferring fund to asset account.

Investment at the end of Year. Being invest sold at on profit.

It is also called Depreciation fund account. An alternative sinking fund formula simply subtracts the salvage value from the purchase cost without taking the present value. The amount invested in securities is allowed to accumulate with compound interest.

In case only a part of the debentures are redeemed, an amount equivalent to the face value of debentures redeemed will only be transferred to general reserve. Being amount of Sinking fund and interest invested.

Related Post, you should check out. The important point to note here is that if securities are purchased from open market, the nominal value of investments purchased will normally be different from the amount paid. Being invest sold at on loss. Reference to the sinking fund table shows that Re.

Formulas for the Sinking Fund Method of Depreciation

The amount of sinking fund installment every year will be. Accordingly, these interest incomes are not re-invested in securities along-with the annual installments. Profit on a redemption of debentures and profit on sale of investments are transferred to sinking fund account.

Formulas for the Sinking Fund Method of Depreciation. The choice of the discount rate is critical to the calculation and carries the risk that interest rates might rise over the life of the asset.

Companies include this extra cost to recognize the fact that they must finance the purchase or construction of the asset. This means that if a company wants to redeem Rs.