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What are the Advanatages and disadvantages of sinking fund method of depreciation?
Wiki User
∙ 12y ago
Sinking Fund Advantages and Disadvantages
On paper, sinking funds appear to be a great program for both businesses and their investors. However, there are advantages and disadvantages to using this type of fund.
Investor Advantage: Piece of Mind
For investors, these accounts represent peace of mind. Investors with securities backed by these funds know that the company is less likely to be unable to pay dividends. Additionally, corporate debentures supported by specialized funds are more likely to receive the principle payment upon maturity.
Corporation Advantage: Long-Term Debt Management
Sinking funds are created so companies can address their debt in advance. As such, businesses have the comfort of having established long-term solutions for handling their debt and repaying their investors. In addition, these accounts give businesses the opportunity to plan for the cost of purchasing new assets such as upgraded machinery, construction work, and new technology.
Example
Technicolor NationwideTechnologies (TNT) establishes a sinking fund at the beginning of its establishment in 1985. 10% of the overall profits are then invested into this account. In addition to these payments, the trust company invests the fund's assets into long-term low risk stocks and bonds to grow capitol. As computers and information technology changes, TNT is able to purchase new electronic equipment using the resources from the fund.
Investor Disadvantage: Repurchasing of Bonds
Corporations with sinking funds periodically repurchase securities and debentures before their maturity. As such, these bonds are repurchased without consent directly from stockholders and bondholders. Businesses can choose to "call" bonds at any time, and no choice is given to the investor about whether or not to part with their holding. Any investor whose bond is purchased will have to forfeit their interest payments. This creates an atmosphere of uncertainty for investors, as they have no knowledge of when a company will choose to purchase back bonds.
Example
Thomas and Jack have both purchased bonds from Harriet's Corporate Housing (HCH). Jack decides to sell his bonds but Thomas wants to hold onto his. However, HCH suddenly "calls" the bonds and purchases them from some investors, including Jack and Thomas. Jack doesn't mind, because he had already decided to sell his off his bonds. Unfortunately, Thomas is upset by his inability to choose to keep his investment, and by the unexpected loss of his interest payments.
Investor Disadvantage: Repurchasing of Bonds at Lower Prices
Not only do corporations repurchase bonds regularly, they do so at a lower price than the bond's initial value. This par value is usually less than what the bond is worth within the actual marketplace. Some companies will also wait for interest rates on bonds to go down before purchasing back securities. As a result, bondholders stand to lose substantial amounts of money when their bonds are repurchased by companies at a lower price than their initial investment.
While sinking funds can represent a more secure investment, they also present the risk of a sudden loss at anytime. This lack of control should be carefully considered if you choose to invest in sinking fund backed stocks and securities.
Wiki User
∙ 12y ago
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What are the advantages and disadvantages of sum of the years digit method of depreciation?
jkijuli
Definition of sinking fund method?
Sinking fund method is a method of depreciation if a large sum of money is required for replacement of an asset at the end of its effective life it may not be advisable to leave in the amount of depreciation set apart annually, for it may or may not be available in the form of the readily realisable assets to the concern at the time it is required. To safegaurd this position the amount annually provided for depreciation may be placed to the credit of the sinking fund account
Accelerated depreciation method?
Accelerated depreciation is method in which double rate for depreciation is used as compare to straight line method.
Straight line method of depreciation?
Straight line depreciation method is that method in which fixed amount of depreciation is charged to all fiscal years in which that asset is used.
What is MT and MSL in accounting depreciation method?
MT and MSL are two depreciation methods used in accounting. They are based on the linear method of depreciation.
Sinking fund method for depreciation?
Sinking fund method for depreciation The straight line method has equal annual depreciation for every year. There are other methods which has more depreciation allocated to the earlier years like Written-Down Value (WDV) method in which depreciation is charged at fixed rate (%) on the reducing balance (i.e. cost less depreciation) every year. The sinking fund method allocates more depreciation to the later years. The depreciation for the first year equals the annual deposit needed for a sinking fund to accumulate at the given rate to an amount that equals the depreciation base. For each consecutive year, the annual depreciation equals the annual sinking fund deposit plus the interest earned on the fund up to that year.
What are the advantages and disadvantages of sum of the years digit method of depreciation?
jkijuli
Definition of sinking fund method?
Sinking fund method is a method of depreciation if a large sum of money is required for replacement of an asset at the end of its effective life it may not be advisable to leave in the amount of depreciation set apart annually, for it may or may not be available in the form of the readily realisable assets to the concern at the time it is required. To safegaurd this position the amount annually provided for depreciation may be placed to the credit of the sinking fund account
Accelerated depreciation method?
Accelerated depreciation is method in which double rate for depreciation is used as compare to straight line method.
Depreciation straight line method?
Straight line depreciation method is that method in which fixed amount of depreciation is charged to all fiscal years in which that asset is used.
Straight line method of depreciation?
Straight line depreciation method is that method in which fixed amount of depreciation is charged to all fiscal years in which that asset is used.
What is MT and MSL in accounting depreciation method?
MT and MSL are two depreciation methods used in accounting. They are based on the linear method of depreciation.
What are the advantages and disadvantages of fixed assets?
One of the advantages of fixed assets are that over the period of the fixed asset, the total burden of depreciation and repair costs are disproportional over the effective life of the asset. One of the disadvantages is that the depreciation is not a suitable method for assets like plants and machinery as depreciation is constant while the repairs on such assets will be heavier in later years.
How is the straight line depreciation method different from declining balance method?
Under straight line depreciation, fixed amount of depreciation is charged to every year while in declining balance method depreciation percentage remains same but depreciation is charged on remaining balance of asset due to which the amount of depreciation is different in every year.
What is the fastest depreciation method?
straight line method
What are the basic method of depreciation?
http://en.wikipedia.org/wiki/Depreciation#Straight-line_depreciation
What is the formula for a straight line depreciation method?
The formula for a straight line depreciation method is the Cost minus the Salvage Value over the Life in Number of Periods which will equal Depreciation.
