On 1st April 2014, X Ltd. issued 20,000 9% Debentures of 100 each redeemable after 4 years. For this purpose a Sinking Fund was established. The investments were xpected to earn 5% net per annum. Sinking Fund Table shows that 20.232012 invested nnually at 5% amounts to 1 in 4 years. Give journal entries and necessary ledger ccounts to deal with the redemption, assuming that investments were realised at par on Ist March 2018. Entries relating to interest on debentures may be ignored..
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What is a Sinking Fund?
A sinking fund is a fund that includes funds set aside or borrowed to pay off a loan or debt. A business that issues debt will have to pay off the debt in the future, and the sinking fund helps ease the burden of a significant revenue outlay.
A sinking fund is formed so that in the years leading up to the maturity of the bond, the corporation will contribute to the fund. A sinking fund allows businesses that have floated debt in the form of bonds to slowly save money and prevent a large lump-sum payment at maturity. Some bonds are issued with a sinking fund feature attached to them.
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