Which of the following are correct about sinking fund?
A. It is a long-term account which can be closed any time.
B. It is a fixed term account.
C. It can be used only for the purpose it was created.
D. It is set up for a particular upcoming expense.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → B, C, and D only
A sinking fund is money set aside regularly over a fixed period to meet a known future expense.
So a sinking fund runs for a fixed term, is kept for one specific purpose, and is not an account that can be closed at will.
Checking the statements
(A) It is a long-term account which can be closed any time. — Incorrect. It is built up for a fixed period and cannot be closed at will.
(B) It is a fixed term account. — Correct. It is maintained for a fixed number of years.
(C) It can be used only for the purpose it was created. — Correct. The money is set aside for a specific purpose.
(D) It is set up for a particular upcoming expense. — Correct. For example, replacing a machine or repaying a debt.