Question

Difference between sinking fund for replacement and sinking fund for redemption of a liability

Answer 1

A sinking fund is a fund which created for the purpose of repayment ofliabilities (redemption of debentures) and replacing fixed assets. ... Any profit on sale of investment is credited in sinking fund account whereas lossis demented to the same account

Answer 2

While the fund for replacement is used for asset replacement, the redemption one is used for paying off a liability

• A sinking fund is a monetary amount that has been reserved over time to reimburse for potential obligations.

• There are two types of sinking funds. These are -

1. Sinking funds for replacement
2. Sinking funds for redemption of a liability.

• When an asset reaches the end of its useful life, money is set aside in a sinking fund for a  replacement to cover the cost of replacing the item.
• For instance, a business might create a sinking fund to cover the cost of replacing equipment that is meant to endure for a number of years.
• To save money to pay off a responsibility, like a bond, when it's due, one uses a sinking fund for the redemption of a liability.
• A government might, for instance, create a sinking fund to pay off its debt when it is due.

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