5. A Given the following data for construction equipment: Initial cost = Php 1,200,000 Economic life = 12 years Estimated salvage value = Php 320,000 Determine the book value after seven years using: a). Straight Line Method b). Sinking fund method using 6% interest
5. A Given the following data for construction equipment: Initial cost = Php 1,200,000 Economic life = 12 years Estimated salvage value = Php 320,000 Determine the book value after seven years using: a). Straight Line Method b). Sinking fund method using 6% interest
Chapter1: Financial Statements And Business Decisions
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**Problem 5: Depreciation Calculation for Construction Equipment**
**Given Data for Construction Equipment:**
- **Initial Cost:** Php 1,200,000
- **Economic Life:** 12 years
- **Estimated Salvage Value:** Php 320,000
**Objective:**
Determine the book value after seven years using the following methods:
a) **Straight Line Method**
b) **Sinking Fund Method (using 6% interest)**
**Solution Outline:**
1. **Straight Line Method:**
- This method spreads the cost evenly across the useful life of the asset.
- Annual depreciation expense is calculated as:
\[
\text{Annual Depreciation} = \frac{\text{Initial Cost} - \text{Salvage Value}}{\text{Economic Life}}
\]
- To find the book value after seven years, calculate the total depreciation over seven years and subtract it from the initial cost:
\[
\text{Book Value after X years} = \text{Initial Cost} - (\text{Annual Depreciation} \times \text{Number of Years})
\]
2. **Sinking Fund Method:**
- This method involves setting aside a fixed amount of money each year in a fund that earns a specified interest rate.
- The depreciation expense is equivalent to the annuity required to accumulate the difference between the initial cost and salvage value over the asset's life.
- The formula for the sinking fund factor (annuity) is:
\[
SFF = \frac{i}{(1+i)^n - 1}
\]
where *i* is the annual interest rate (6% or 0.06) and *n* is the number of periods (12 years).
- The annual sinking fund deposit \(A\) is calculated as:
\[
A = (\text{Initial Cost} - \text{Salvage Value}) \times SFF
\]
- To determine the book value after seven years, the accumulated depreciation using the sinking fund approach should be subtracted from the initial cost.
The detailed steps and calculations shall be illustrated for a comprehensive educational understanding.
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Transcribed Image Text:---
**Problem 5: Depreciation Calculation for Construction Equipment**
**Given Data for Construction Equipment:**
- **Initial Cost:** Php 1,200,000
- **Economic Life:** 12 years
- **Estimated Salvage Value:** Php 320,000
**Objective:**
Determine the book value after seven years using the following methods:
a) **Straight Line Method**
b) **Sinking Fund Method (using 6% interest)**
**Solution Outline:**
1. **Straight Line Method:**
- This method spreads the cost evenly across the useful life of the asset.
- Annual depreciation expense is calculated as:
\[
\text{Annual Depreciation} = \frac{\text{Initial Cost} - \text{Salvage Value}}{\text{Economic Life}}
\]
- To find the book value after seven years, calculate the total depreciation over seven years and subtract it from the initial cost:
\[
\text{Book Value after X years} = \text{Initial Cost} - (\text{Annual Depreciation} \times \text{Number of Years})
\]
2. **Sinking Fund Method:**
- This method involves setting aside a fixed amount of money each year in a fund that earns a specified interest rate.
- The depreciation expense is equivalent to the annuity required to accumulate the difference between the initial cost and salvage value over the asset's life.
- The formula for the sinking fund factor (annuity) is:
\[
SFF = \frac{i}{(1+i)^n - 1}
\]
where *i* is the annual interest rate (6% or 0.06) and *n* is the number of periods (12 years).
- The annual sinking fund deposit \(A\) is calculated as:
\[
A = (\text{Initial Cost} - \text{Salvage Value}) \times SFF
\]
- To determine the book value after seven years, the accumulated depreciation using the sinking fund approach should be subtracted from the initial cost.
The detailed steps and calculations shall be illustrated for a comprehensive educational understanding.
---
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