Using below data, calculate depreciation using sinking fund method.
Initial cost of an equipment is Rs. 5000000/- , life span of equipment is 15 years,
Salvage value = Rs. 250000/-, interest rate = 10%

Solution

The solution is given below −

Depreciable cost = 5000000 – 250000 => Rs.4750000/-
Sinking fund value = [interest/ {(1+interst) ^period -1} => [0.1/{(1+0.1)^15-1} => 0.03147
Annual depreciation = depreciable cost * sinking fund factor => 4750000*0.03147 =>Rs. 149482.5/-
Book value (year 1) => 5000000 – 149482.5 => Rs.4850517.45/-
Interest earned (end of 2nd year) => 149482.5 * 0.1 => Rs.14948.25/-
Increased fund (for 2nd year) => 149482.5+14948.25 => Rs.164430.75/-
Accumulated Depreciation (end of 2nd year) => 149482.5+164430.75 => Rs.313913.25/-
Book value (end of 2nd year) => (4850517.45 – 164430.75) => Rs.4686086.7/-
Interest earned (at the end of 3rd year) => 313913.25 * 0.1 => Rs.31391.325/-
Increase in fund (for 3rd year) => 391.325 + 149482.5 => Rs.180873.825/-
Accumulated depreciation (end of 3rd year) => 313913.25 + 31391.325 => Rs.345304.575/-
Book value (end of 3rd year) => 4686086.7 – 180873.825 => Rs.4505212.875/-
Interest earned (end of 4th year) => 345304.575 * 0.1 => Rs.34530.4575/-
Increase in fund (for 4th year) => 149482.5 + 34530.4575 => Rs.184012.9575/-
Accumulated depreciation (end of 4th year) => 345304.575 + 184012.9575 => Rs.529317.5325/-
Book value (end of 4th year) => 4505212.875 – 184012.9575 => Rs.4321199.9175/-
Interest earned (end of 5th year) => 529317.5325 * 0.1 => Rs.52931.75325/-
Increase in fund value (for 5th year) => 149482.5 + 52931.75325 => Rs.202414.25325/-
Accumulated depreciation (end of 5th year) => 529317.5325 + 202414.25325 => Rs.731731.78575/-
Book value (end of 5th year) => 4321199.9175 – 202414.25325 => Rs.4118785.66425/-