Sinking Fund Method For Redemption of Debentures


              A sinking fund may be defined as a fund created by a charge against or appropriation of profits and represented by specific investments. The accounting entries for creating a Sinking Fund would be as under:
I.
First Year:

On the date of issue of Debentures:

1. For issue of Debentures

Bank A/c Dr.

                  To % Debentures A/c

At the end of first year:

2. For amount of Sinking Fund Charged to Profit & Loss Appropriation A/c

Profit & Loss Appropriation A/c Dr.

                  To Sinking Fund A/c

3. For Investments made for the amount of sinking fund

Sinking Fund Investment A/c Dr. (with the amount of sinking fund)

                    To Bank A/c
II.
At the end of second and subsequent years during the life of the debentures excepting last year:

1. For receipt of interest on investment

Bank A/c Dr.

                    To Interest on Sinking Fund Investment A/c

2. For interest on investment t/f to sinking fund

Interest on Sinking Fund Investment A/c Dr.

                    To Sinking Fund A/c

3. For amount of Sinking Fund Charged to Profit & Loss Appropriation A/c

Profit & Loss Appropriation A/c Dr.

                     To Sinking Fund A/c

4. For Investments made for the amount of sinking fund

Sinking Fund Investment A/c Dr. (with the total amount of annual sinking fund + interest)

                     To Bank A/c
III.
Last year:

1. For receipt of interest on investment

Bank A/c Dr.

                    To Interest on Sinking Fund Investment A/c

2. For interest on investment t/f to sinking fund

Interest on Sinking Fund Investment A/c Dr.

                    To Sinking Fund A/c

3. For amount of Sinking Fund Charged to Profit & Loss Appropriation A/c

Profit & Loss Appropriation A/c Dr.

                    To Sinking Fund A/c

4. For sale of investment

Bank A/c Dr.

                   To Sinking Fund Investment A/c

5. For gain on sale of investment

Sinking Fund Investment A/c Dr.

                 To Sinking Fund A/c

Or

For loss on sale of investment

Sinking Fund A/c Dr.

                 To Sinking Fund Investment A/c

6. For amount of debentures due to Debenture holders:

(a) when debentures are redeemable at par:

% Debentures A/c Dr.

                  To Debenture holders A/c

(b) when debentures are redeemable at premium:

% Debentures A/c Dr.

Premium on Redemption of Debentures A/c Dr.

                  To Debenture holders A/c

7. For payment to Debenture holders:

Debenture holders A/c Dr.

                   To Bank A/c

8. For transfer of Sinking Fund to General reserve

Sinking Fund A/c Dr.

                  To General Reserve A/c