Which of the following statements about the Sinking Fund are correct?
(A) It is a fund established by a business entity by setting aside revenue over a period of time to fund a future capital expense.
(B) It is a fund established by a business entity by setting aside revenue over a period of time to fund a future repayment of a long-term debt.
(C) It is set up for any purpose that it may serve.
(D) It is a fund that is accumulated for the purpose of paying off a financial obligation at some future designated date.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A), (B) and (D) only
A sinking fund is created to accumulate money for repaying a long-term liability or financial obligation in future.
(A) It is for future capital expense → Correct.
(B) It is for future repayment of long-term debt → correct.
(C) It is set up for any purpose → incorrect.
(D) It is accumulated to pay off a financial obligation at a future date → correct.
Final Answer: (A), (B) and (D)