Question

what is sinking fund method for debenture redemption? explain it

Answer 1

This is very important method of redemption of debenture. Sinking fund means take one part of profit for repayment of debenture. This is calculated with sinking fund table. This is invested in such scheme which gives us Lumbsum amount so that we can easily repay the debenture without any tension. This is very popular and scientific method of redemption of debenture. In this method we open the sinking fund and sinking fund investment account. Sinking fund’s other name is also Debenture Redemption Fund Account. The following accounting treatment is done by the accountant of company when the company follow this method .

In the end of first year

1st journal entry for taking reserve from profit
Profit and loss appropriation account Debit
Sinking Fund Account Credit

2nd Journal Entry for invest the sinking fund
Sinking fund investment Account Debit
Bank Account Credit
In the end of next years but not end last year

3rd Journal Entry for receiving interest on investment
Bank Account Debit
Interest on sinking fund investment Account Credit
4th Journal Entry for transferring interest to sinking fund
Interest on Sinking fund investment account Debit
Sinking fund Account Credit

5st journal entry for taking reserve from profit
Profit and loss appropriation account Debit
Sinking Fund Account Credit

6th Journal Entry for invest the sinking fund
Sinking fund investment Account Debit
Bank Account Credit