Question

An old machine was purchased 3 years ago at a cost of ?50,000. It was estimated to have a useful life of 8 years, with a salvage value of ?5,000. It is now going to be replaced by a new machine costing ?70,000 and ?30,000 trade-in will be allowed for the old machine. Determine the sunk cost if depreciation has been computed by the (a) straight line method, (b) sinking fund method at 16% and (c) SOYD method.

Answer 1

Depreciation per year according to fixed line method = (50,000-5000)/8

= 45,000/8 = 5625

Value of the machinery after 3 years by fixed-line method = 50,000-(5625*3)= 33,125

Sunk Cost = 33,125 - 30,000 = 3,125

According to Sinking Fund Method

Value of machine after 3 years by sinking fund method = 50,000 * (0.84)³ = 29635

Sunk Cost = 29,635 - 30,000 = (-)365

Thus, there is a profit of 365 on sale of machinery according to sinking fund method

SYD Depreciation = Depreciable Base * (Remaining Useful Life/Sum of the Years Digits)

Depreciable Base = 50,000 - 5,000 = 45,000

Remaining Useful Life = 5 years

Sum of the years digit = (8*9)/2 = 36

Depreciation = (45,000 * 5/36) = 6,250

Sunk Cost = 43,750 - 30,000 = 13,750