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An asset is purchased for P 724426. The salvage value in 11 years is P 35797....

An asset is purchased for P 724426. The salvage value in 11 years is P 35797. Determine the depreciation during the third year using sinking fund method at 5%

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Answer #1

Solution : FC = First cost of an asset

SV = Salvage value of an aaset

n = Number of years

i = rate of interest

a. Solve for the annual depreciation:

Annual Depreciation (A)= [(FC - SV) ( interest rate )] / [ 1+ interest ^ (n) -1]

A= [ ( 724426 - 35797)× (0.05) ] / [ (1 + 0.05) ^ 11 - 1]

A= [ (688629)×(0.05)] / [1.05 ^ (11) - 1]

A = [ 34431.45] / [1.710339358 - 1]

A = [ 34431.45] / [0.710339358]

A = P 48471.83196

b.Solve for the depreciation in 3rd year :

Total depreciation after x years = A [ (1 + interest) ^ (x) - 1] / interest

Total depreciation = 48471.83196 [ ( 1 + 0.05)^ (3) - 1 ] / 0.05

Total depreciation = 48471.83196 [ (1.05)^(3) - 1] / 0.05

= 48471.83196 [ 1.157625 - 1 ] / 0.05

= 48471.83196 [0.157625] / 0.05

= 7640.372512 / 0.05  

= P 152807.4502

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