The fund created to accumulate money over the years to discharge a future obligation is known as:
The fund created to accumulate money over the years to discharge a future obligation is known as:
Solution
A Sinking Fund is a fund created to accumulate money over time to discharge a future obligation. It works like a savings account that is regularly filled to pay off a big expense in the future.
For example: Instead of paying a large amount all at once in the future, regular deposits are made into the fund. These deposits accumulate over time to meet the future payment obligation.
Option 1: Emergency Fund
An emergency fund is money saved for unexpected emergencies like medical bills, job loss, or urgent repairs. It is not planned for a specific future obligation.
This does not match the definition.
Option 2: Perpetuity
Perpetuity means receiving equal payments forever, like endless rent income. Money is being received, not accumulated to pay an obligation.
This does not match the definition.
Option 3: Sinking Fund
Money is accumulated gradually through regular deposits. The fund is created for a known future obligation such as loan repayment, bond redemption, or equipment replacement.
This matches the definition perfectly.
Option 4: Equity
Equity means ownership in a company through shares or stocks. It has nothing to do with accumulating money for future obligations.
This does not match the definition.
The fund created to accumulate money over the years to discharge a future obligation is a Sinking Fund.
Therefore, the answer is Option 3: Sinking Fund.
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