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In Sinking Fund for redemption of Debentures Account, the amount is transferred every year from
- a)Reserve Account
- b)Profit and Loss Account
- c)Capital Account
- d)None of the above
Correct answer is option 'B'. Can you explain this answer?
Verified Answer
In Sinking Fund for redemption of Debentures Account, the amount is tr...
Option 2 : Profit and Loss Account
Important PointsSinking Fund -
Important PointsSinking Fund -
- A sinking fund is a specific kind of fund that is established with the intention of paying off debt.
- The account holder routinely sets aside a specified sum of money and utilizes it only for that reason.
- Corporations frequently use it for bonds and deposit funds to purchase issued bonds or portions of bonds before the maturity date.
- Each year, profits are used to fund a sinking fund or debt redemption fund in an equal amount.
- After debentures are redeemed, the remaining funds in the Debentures Sinking Fund are moved to the General Reserve account.
- It is transferred to the general reserve account since it is the portion of the redeemed debenture proceeds that is held apart.
Most Upvoted Answer
In Sinking Fund for redemption of Debentures Account, the amount is tr...
Sinking Fund for Redemption of Debentures
The Sinking Fund is a financial strategy used by companies to set aside money over time to repay debt, particularly debentures, when they mature. Understanding the source of the funds for this account is crucial.
Why Profit and Loss Account?
- The Sinking Fund is typically funded through profits generated by the company.
- Profit and Loss Account reflects the company's earnings after expenses, which can be allocated for various purposes, including the Sinking Fund.
Transfer from Profit and Loss Account
- The amount transferred to the Sinking Fund is derived from profits, which ensures that the company maintains liquidity while fulfilling its debt obligations.
- By transferring funds annually, the company avoids a significant cash outflow at the time of debenture redemption, making it a more manageable option.
Other Accounts Explained
- Reserve Account: This account usually contains funds set aside for specific future expenses or contingencies, not specifically for debenture redemption.
- Capital Account: This account reflects the owner's equity and is not a source for funding the Sinking Fund. It represents long-term investments rather than the profits available for distribution.
- None of the Above: This option is incorrect as the funding originates from the Profit and Loss Account.
Conclusion
In summary, the correct answer is option 'B' because the funds for the Sinking Fund for the redemption of debentures are transferred from the Profit and Loss Account, ensuring the company can manage its debt repayment effectively while maintaining operational liquidity.
The Sinking Fund is a financial strategy used by companies to set aside money over time to repay debt, particularly debentures, when they mature. Understanding the source of the funds for this account is crucial.
Why Profit and Loss Account?
- The Sinking Fund is typically funded through profits generated by the company.
- Profit and Loss Account reflects the company's earnings after expenses, which can be allocated for various purposes, including the Sinking Fund.
Transfer from Profit and Loss Account
- The amount transferred to the Sinking Fund is derived from profits, which ensures that the company maintains liquidity while fulfilling its debt obligations.
- By transferring funds annually, the company avoids a significant cash outflow at the time of debenture redemption, making it a more manageable option.
Other Accounts Explained
- Reserve Account: This account usually contains funds set aside for specific future expenses or contingencies, not specifically for debenture redemption.
- Capital Account: This account reflects the owner's equity and is not a source for funding the Sinking Fund. It represents long-term investments rather than the profits available for distribution.
- None of the Above: This option is incorrect as the funding originates from the Profit and Loss Account.
Conclusion
In summary, the correct answer is option 'B' because the funds for the Sinking Fund for the redemption of debentures are transferred from the Profit and Loss Account, ensuring the company can manage its debt repayment effectively while maintaining operational liquidity.
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