Question

A sinking fund is created for redeeming debentures worth rs 5 lakh at the end of 25 years. How much provision needs to be made out of profit each year provided sinking fund investments can earn interest at 4% p.A.?

Answer 1

Under this method, Sinking Fund or Debenture Redemption Fund of an equal amount is created out of profits every year. The amount to be credited to sinking fund is calculated with the help of Sinking Fund Table. This fund is invested out-side the business in securities every year.
The amount invested in securities is debited to ‘Sinking Fund Investment, or Debenture Redemption Fund Investment Account. The amount invested in securities is allowed to accumulate with compound interest. The face value and market price of securities may differ. But the interest is always calculated on the face value of securities.

Answer 2

Answer:

12006

Explanation: FUTURE VALUE: 500000

                     N= 25 YEAR

                     i = 4%= 0.04

                  A( ANNUITY)= ?????

USING THE FORMULA OF FUTURE VALUE OF ANNUITY

FV=a[( 1+ i)n- 1/ i

500000 = a [( 1+ 0.04) power 25 - 1/ 0.04

500000= a( 41.6459)

500000/ 41.6459 = a

12006 = a ( FINAL ANS)