Which of the following are true about sinking fund?
(A) Sinking fund is a fixed term account.
(B) A fixed amount is deposited at pre defined regular intervals.
(C) Sinking fund can be used in any emergency.
(D) It is setup for a particular upcoming expense.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A), (B) and (D) only
A sinking fund is money set aside by making equal deposits at regular intervals for a fixed period, so that a known amount is available at the end of the period to meet a planned future expense (for example, replacing a machine or repaying a loan). Its value is the amount of an annuity.
So a sinking fund has a fixed term, equal deposits at regular intervals and one planned purpose; it is not an emergency fund.
Checking the statements
(A) Sinking fund is a fixed term account. — Correct. Deposits are made for a fixed period that ends when the money is needed.
(B) A fixed amount is deposited at pre defined regular intervals. — Correct. The equal periodic payments form an annuity.
(C) Sinking fund can be used in any emergency. — Incorrect. That describes an emergency fund; a sinking fund is kept for one planned purpose.
(D) It is setup for a particular upcoming expense. — Correct. This is the purpose of the fund.