Question

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:

• A. (A), (B) and (D) only
• B. (A), (B) and (C) only
• C. (C) and (D) only
• D. (B), (C) and (D) only

Hint:

Think of a sinking fund as a "targeted savings account" for a big, specific future expense. It's not a general-purpose rainy day fund. Its structure (regular payments over a fixed term) is the key to its function.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
A sinking fund is a financial tool used primarily by corporations and governments to accumulate money for a specific future purpose, typically to repay a long-term debt or to replace a depreciating asset.
Step 2: Detailed Explanation:
Let's analyze each statement:
(A) It is a fixed term account.
This is correct. A sinking fund is established to meet a financial obligation at a specific future date, so it operates over a fixed term.
(B) It is a set-up for a particular upcoming expense.
This is correct. The purpose of a sinking fund is to earmark funds for a specific, predetermined future liability or capital expenditure, such as redeeming a bond issue or buying new machinery.
(C) A fixed amount at regular intervals is deposited in the Sinking Fund.
This is correct. The fund grows through a series of regular, periodic contributions (like an annuity), allowing the required amount to be accumulated systematically.
(D) It can be used in any emergency.
This is incorrect. A sinking fund is a restricted fund, meaning the money is designated for a specific purpose and cannot be used for general purposes or unrelated emergencies. This is different from a contingency fund or emergency fund.
Step 3: Final Answer:
Statements (A), (B), and (C) accurately describe a sinking fund. Statement (D) is incorrect. Therefore, the correct option is (B).