Which of the following statements are true about the sinking fund ?
(A) In the sinking fund, a fixed amount at regular intervals is deposited.
(B) Sinking fund can be used in an emergency.
(C) In the sinking fund, any amount, anytime, 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 2
The correct answer is Option (2) → (A) and (D) only
A sinking fund is a fund built up by setting aside a fixed sum at regular intervals, usually earning interest, to meet a specific future liability such as repaying a debt or replacing an asset. It works like an annuity.
So a sinking fund takes fixed deposits at regular intervals and is kept only for the purpose for which it was created.
Checking the statements
(A) In the sinking fund, a fixed amount at regular intervals is deposited. — Correct. Regular equal deposits are what make it an annuity.
(B) Sinking fund can be used in an emergency. — Incorrect. It is earmarked for its stated purpose; money for emergencies is an emergency fund.
(C) In the sinking fund, any amount, anytime, can be deposited. — Incorrect. The deposits are fixed in amount and timing.
(D) Sinking fund can be used only for the purpose it was created. — Correct. It is set aside for one specific liability.