Which of the following are correct about the Sinking Fund?
(A) It is a fixed term account.
(B) It is a set-up for a particular upcoming expense.
(C) A fixed amount at regular intervals is deposited in the Sinking Fund.
(D) It can be used in any emergency.
Choose the correct answer from the options given below:
Which of the following are correct about the Sinking Fund?
(A) It is a fixed term account.
(B) It is a set-up for a particular upcoming expense.
(C) A fixed amount at regular intervals is deposited in the Sinking Fund.
(D) It can be used in any emergency.
Choose the correct answer from the options given below:
Solution
A Sinking Fund is a savings mechanism where regular deposits are made over a fixed period to accumulate funds for a specific planned future expense.
Statement (A): It is a fixed term account.
This is correct. A sinking fund operates for a predetermined time period until the target amount is reached or the planned expense occurs.
Statement (B): It is set-up for a particular upcoming expense.
This is correct. A sinking fund is established for one specific known future expense, such as purchasing equipment, funding a project, or replacing assets.
Statement (C): A fixed amount at regular intervals is deposited in the Sinking Fund.
This is correct. The defining characteristic of a sinking fund is that equal amounts are contributed at regular intervals (monthly, quarterly, or annually).
Statement (D): It can be used in any emergency.
This is incorrect. A sinking fund is designed for planned, anticipated expenses, not unexpected emergencies. An emergency fund serves the purpose of covering unforeseen situations, while a sinking fund addresses predetermined financial obligations.
Statements (A), (B), and (C) are correct about Sinking Funds.
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