A machine costs Php 332,631 with a salvage value of Php 44,647 at the end of...

A machine costs Php 332,631 with a salvage value of Php 44,647 at the end of its life of 11 years. If money is worth 5% annually, use Sinking Fund Method and determine the depreciation at the 2th year. MANUAL SOLUTION PLEASE

Expert Solution

Sinking fund method is based on the assumption of setting up a sinking fund in which money accumulates to replace the existing asset at the proper time.

The method changes annually to revenue account search some as with compound interest will amount to to the cost of the asset at the end of the useful life.

The identical sum is charged every year as depreciation.

this is invested outside the business so that from the end of the second year and each subsequent year the interest is added.

At the end of the useful life of , the total amount in depreciation + compound interest should be equal to the original cost of the fixed asset.

this is the only method of calculating the depreciation which provides cash for the replacement of assets at the end of the useful life forecast for it.

Rahul Sunny answered 1 year ago

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