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Method of Calculation of Depreciation 

Accounting treatmen



Illustration 8


A Ltd. purchased machinery for ₹ 2,25,000 on 1st April, 2010 and incurred ₹ 25,000 towards freight, insurance, carriage inwards and installation charges. It was estimated that the machinery will have a scrap value of ₹ 17,950 at the end of its useful life which is 4 years.

It was decided to institute a sinking fund for the purpose of accumulating sufficient funds to replace the machinery at the end of its useful life and to invest in some readily convertible securities yielding 10% interest p.a. A reference to the table shows that ₹ 1 p.a. at 10% compound interest amounts to ₹ 4.641 in 4 years. Investments are to be made in the bonds of ₹ 100 each available at par.

On 31st March, 2014, the investments realized ₹ 1,70,000 and scrap value of the machinery realized ₹ 18,450 only. A new machine costing ₹ 2,50,000 was purchased on 31-3-2014.


Required: Prepare the necessary ledger accounts in the books of A Ltd. for 4 years.

Note: Sinking Fund Investment is also called as Depreciation Fund Investment. 

Working Notes:


(i) Calculation of the amount to be charged to Profit and Loss Account.

(ii) Calculation of the amount of amount of investments and interest.

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