Which of the following is true about the sinking fund?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → It is a fixed term account.
A sinking fund is a fund set up to meet a known future liability, such as replacing a machine or repaying a debt, by depositing equal amounts at regular intervals for a fixed number of periods.
Because the target amount, the instalments and the date of use are all fixed in advance, it is a fixed term account.
Why the other options are incorrect
Option (1) It does not have any specific purpose. — Incorrect. A sinking fund is created for a specific purpose, a known future liability.
Option (2) Any amount, any time can be deposited in the sinking fund. — Incorrect. Deposits are fixed, equal amounts made at regular intervals, not any amount at any time.
Option (3) It can be used in any emergency. — Incorrect. The fund is earmarked for its purpose and is not meant to be withdrawn for emergencies.