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 built up by setting aside money regularly over a period, so that a known amount is ready on a fixed future date for a specific purpose: a future capital expense (such as replacing machinery) or the repayment of a long-term debt.
(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. — Correct. Meeting a future capital expense is one of its two main purposes.
(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. — Correct. Repaying a long-term debt, such as bonds, is the other main purpose.
(C) It is set up for any purpose that it may serve. — Incorrect. A sinking fund is set up for a specific, planned obligation, not for any purpose.
(D) It is a fund that is accumulated for the purpose of paying off a financial obligation at some future designated date. — Correct. This is the definition: money is accumulated to meet an obligation falling due on a fixed date.
CBSE Applied Mathematics (Class XII):
Sinking Fund
