Question

Answer the question.
What is the difference between Sinking Fund Method and Insurance Policy Method?

Answer 1

There is a lot of similarities in the two methods as both invest the amount of depreciation and at the end of life of machinery the money is used for replacing the machinery. But a major difference between the two methods is: In Insurance Policy Method, insurance is taken for the required sum and every year in the beginning insurance premium is paid. While in case of Sinking Fund Method, securities are purchased and these investments are made at the end of each year. Insurance Policy Method is less risky because maturity amount will be received certainly but in Sinking Fund Method it can be risky as the market value of securities can change.