How do you record a sinking fund?

A bond sinking fund is reported in the section of the balance sheet immediately after the current assets. The bond sinking fund is part of the long-term asset section that usually has the heading “Investments.” The bond sinking fund is a long-term (noncurrent) asset even if the fund contains only cash.

Which entry is passed for creating sinking fund account?

For creating sinking fund: Profit and loss appropriation a/c Dr. (For the annual installment to be invested).

Why sinking fund is credited?

Basically, the sinking fund is created to make paying off a debt easier and to ensure that a default won’t happen because there is a sufficient amount of money available to repay the debt.

What is sinking fund method in accounting?

The sinking fund method is a technique for depreciating an asset while generating enough money to replace it at the end of its useful life. As depreciation charges are incurred to reflect the asset’s falling value, a matching amount of cash is invested. These funds sit in a sinking fund account and generate interest.

Can sinking fund be current asset?

Sinking fund accounts do not belong under Current Assets even though they are normally cash accounts. They are not Current Assets because the firm cannot use them as working capital. These funds must remain on deposit until the end of fund life, when they serve their original purpose.

What is depreciation fund method write entries required?

Under this method a fixed amount is debited every year to Depreciation Account or Profit and Loss Account and is credited to Depreciation Fund Account, instead of Asset Account. The asset is shown at its original cost, in the books, in every year.

When debenture become due for redemption the entry is?

Premium on redemption of debentures account was given credit, when the debentures were issued. On redemption, this account is debited and transferred to Debenture holders’ account.

Is credited to repayment of debenture holders?

Lump Sum Method Here the company will repay the whole amount in one lump sum payment to the debenture holders. This debenture redemption reserve is a capital reserve account. It is funded by the divisible profits of each year, i.e. a portion of the profits are set aside for this purpose.

Is sinking fund an asset?

A sinking fund is typically listed as a noncurrent asset—or long-term asset—on a company’s balance sheet and is often included in the listing for long-term investments or other investments.

Who operates sinking fund?

A sinking fund is maintained by companies for bond issues, and is money set aside or saved to pay off a debt or bond. Bonds issued with sinking funds are lower risk since they are backed by the collateral in the fund, and therefore carry lower yields.

How do you calculate sinking fund?

To calculate the size of the sinking fund, one can use the formula.

  1. A = P.A (n,i)
  2. A = Saving amount. P = Periodic payment.
  3. Example: Calculate the needed amount that must be invested every year so that the total amount sums up to Rs. 3,00,000 by the end of 10 years.
  4. Solution: Here, A = Rs.
  5. A = P.A (n,i)

Is sinking fund asset or liability?

What is the journal entry for sinking fund depreciation?

Give the journal entry for the sinking fund deprecation method. Explain sinking fund depreciation. Differentiate between sinking fund depreciation and annuity method of depreciation. What is annuity method of deprecation?

Where does a sinking fund go on a balance sheet?

It is a long-term asset that is created solely for the purpose of retiring bonds. It is reported in the Asset section of the Balance Sheet under the Long Term Asset Head within the Investment classification. It is not classified under Current Assets

How is interest earned in a sinking fund?

The interest will be earned on the amount which is invested every year and will remain invested till the useful life of the asset. At the time of the replacement of the asset, the investment is sold and the new asset is purchased from the sale proceeds.

How is book value transferred to sinking fund?

At the time of the replacement of the asset, the investment is sold and the new asset is purchased from the sale proceeds. At this time, the book value of the old asset that needs to be replaced is transferred to the Sinking Fund Account.