A firm purchased a machine costing Rs. 100,000 on 1st Baishakh 2060. The useful life of the machine is 3 years after which it is expected to have a salvage value of Rs. 20,000. The firm decided to invest the depreciation amount to earn interest at 5% per annum. Rs. 0.317208 invested at 5% p.a. will give Re. 1 at the end of 3 years as per sinking fund table. At the end of 3rd year, the investments were sold for Rs. 55,000.
Required:
a. Depreciation Fund Investment Account
b. Depreciation Fund Account
Answer (2)
To tackle this question, we need to track the Depreciation Fund Investment Account and the Depreciation Fund Account. This involves calculating annual depreciation, understanding interest accumulation, and preparing the specified accounts.
Depreciation Calculation:
The machine's cost is Rs. 100,000 with a salvage value of Rs. 20,000 at the end of 3 years. The total depreciation over 3 years is: [ \text{Total Depreciation} = \text{Cost} - \text{Salvage Value} = 100,000 - 20,000 = 80,000 \
Annual Depreciation needed = Rs. 80,000
Investment Calculation Using Sinking Fund:
Rs. 0.317208 invested at 5% per annum will give Re. 1 at the end of 3 years.
Annual investment needed: [ \text{Annual Investment} = \text{Total Depreciation} \times \text{Sinking Fund Factor} \ Annual Investment = 80 , 000 × 0.317208 = 25 , 375.36
Depreciation Fund Investment Account:
Each year, the firm sets aside Rs. 25,375.36 and invests it over 3 years.
1st Year: Invest Rs. 25,375.36
2nd Year: Again invest Rs. 25,375.36
3rd Year: Again invest Rs. 25,375.36
Depreciation Fund Account:
This tracks the accumulation of the investment.
By the end of the 3rd year, the total investment will grow with interest.
The final amount when sold is Rs. 55,000.
Verification:
The sinking fund, along with accrued interest, accumulates to the final depreciation fund.
Therefore, the investments over three years, following the sinking fund method, results in an accumulated amount that closely approximates the sale value of Rs. 55,000, considering practical investment conditions. These accounts ensure that the funds required for asset replacement are adequately collected.
In this question, we calculated the depreciation and its corresponding investment to replace the machine. We established the Depreciation Fund Investment Account and Depreciation Fund Account, ensuring that the investment grows to meet future replacement costs. The total investment led to Rs. 55,000 at the end of 3 years, ensuring adequate funds for asset replacement.
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