The crew of the SS Silverburn are believed to have been allowed to abandon ship by the U-boat commander before it was sunk by the sub's gun.
Now divers Rod Macdonald and Paul Haynes from Stonehaven have identified the First World War wreck of the Silverburn - lying in 200ft down, off Cove Bay.
Mr Macdonald said its cargo of coal was virtually still in tact.
The Silverburn was en route from Sunderland to Peterhead when it was stopped by the U-boat.
At the start of the First World War U-boats were used to attack British and French merchant ships, which were unarmed.
The U-boat would surface near the ship and order it to stop before sending over a boarding party in a boat.
On June 13, 1917, the Silverburn was halted by UB-41 commanded by Gunther Krause. UB-41 sank eight ships in 13 patrols before it was struck by a mine and sank in the North Sea on October 5, 1917.
Krause switched to another U-boat the month before and survived the war.
Sometimes U-boat captains even towed the lifeboats containing the crew of the sunken ship close to land, so the crew could be saved.
It is not clear how the Silverburn crew got ashore but it is likely they rowed.
It is believed the Silverburn may have been too small to waste a torpedo on.
"We descended in fine visibility to find a small WWI era steamship sitting on its keel," said Mr Macdonald.
"She is charted about a mile away from where she was reported - and the fishing net is still on her."