Redemption of debentures by sinking fund

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Chintan Patel (Querist)

23 November 2013 Hello Everyone!
Can anyone please let me know the basic purpose of creating Sinking Fund?
How does it help in redemption of debentures?
Would it not enough to just invest some money (sinking fund investment)?why SF then?
Sinking Fund just ensures that the money does not flow out of the company in the form of dividends (pls correct me if i am wrong)
but does not ensure ceasing of outflow other than in the form of dividends,isn't it?

In short...please explain how does sinking fund work?

-Thanking You in advance!!!

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)

25 November 2013 This is very important method of redemption of debenture. Sinking fund means take one part of profit for repayment of debenture. This is calculated with sinking fund table. This is invested in such scheme which gives us Lumpsum amount so that we can easily repay the debenture without any tension. This is very popular and scientific method of redemption of debenture. In this method we open the sinking fund and sinking fund investment account. Sinking fund’s other name is also Debenture Redemption Fund Account.

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Chintan Patel

Chintan Patel (Querist)

26 November 2013 Sir! But why do we need to create fund and show it on the liabilities side?
Won't it suffice if just SF investment a/c is created and shown on assets side?

-again my sincere Thanks

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)

26 November 2013 It is the system of double entry system and show the liability requirement against the sinking fund investment. such as we cannot use that investment anyother purpose other than debenture redemption

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Chintan Patel

Chintan Patel (Querist)

26 November 2013 Sinking Fund Investment a/c....dr
To Cash a/c

Won't this suffice

I am sorry for asking so much...but i am really confused since this a new topic for me

What would be the consequence(accounting wise)
if sinking fund is not shown on the liabilities side?

What does creating a fund ensure?

Thank You!!!

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