Which of the following are correct?
(A) Sinking fund is a fixed term account.
(B) Sinking fund is set-up for a particular upcoming expense.
(C) In sinking fund any amount, any time can be deposited.
(D) Sinking fund can be used only for the purpose it was created.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A), (B) and (D) only
A sinking fund is money set aside regularly, over a fixed period, to meet a known future expense or to repay a debt. The deposits are fixed payments made at regular intervals, calculated so that the fund reaches the required amount. It differs from a savings account, which is open-ended, takes any amount at any time and can be used for anything.
So a sinking fund has a fixed term, a fixed purpose and fixed regular deposits.
Checking the statements
(A) Sinking fund is a fixed term account. — Correct. It is built up over a fixed period that ends when the expense falls due.
(B) Sinking fund is set-up for a particular upcoming expense. — Correct. Its purpose, such as replacing a machine or repaying a bond, is decided when it is created.
(C) In sinking fund any amount, any time can be deposited. — Incorrect. Deposits are fixed amounts at regular intervals; any amount at any time is a feature of a savings account.
(D) Sinking fund can be used only for the purpose it was created. — Correct. The money is kept aside for that purpose only.