Economics · Financial Accounting
A sinking fund is a financial tool used to set aside a fixed sum periodically to meet a future liability. Which of the following statements correctly identifies the mathematical and accounting treatment of a sinking fund?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The sinking fund is a liability on the balance sheet and the periodic payments are treated as capital expenditure.
- 2The annual installment is calculated as the future value of an ordinary annuity, and the fund itself acts as an asset that accumulates over time to match the future liability.✓
- 3The sinking fund assumes simple interest only, and payments are made at the beginning of each year, making it an annuity due.
- 4A sinking fund is exclusively used for the depreciation of intangible assets and cannot be used for debt redemption.
Correct answer
The annual installment is calculated as the future value of an ordinary annuity, and the fund itself acts as an asset that accumulates over time to match the future liability.
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