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venchlu
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Joined: 18 Aug 2009
Location: United States
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Posts: 587

Posted: 14 Apr 2010 at 14:52 \| IP Logged

An issuer of bonds uses a sinking fund for the retirement of the bonds. Cash was transferred to the sinking fund and subsequently used to purchase investments. The sinking fund

I. Increased by revenue earned on the investments

II. Is NOT affected by revenue earned on the investments

III. Decreases when the investments are purchased.

a. I only

b. I and III only

C. II and III

D. III only

The correct answer is A.

What is wrong with statement III?? Thanks!

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mits07
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Joined: 22 Jan 2010
Location: United States
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Posted: 14 Apr 2010 at 18:43 \| IP Logged

The Sinking Fund is an asset (Non-Current Asset) on the B/S.

To record the sinking fund:

Dr. Bond Sinking Fund (asset)

Cr. Cash

lululene
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Joined: 26 Mar 2010
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Posted: 22 Apr 2010 at 20:57 \| IP Logged

A bond sinking fund is affected by (1) additions to or withdrawals from the fund, (2) fund earnings, (3) gains or losses on the disposal of fund assets and (4) fund operating expenses. The exchange of one asset for another within the fund (such as the exchange of cash for an investment) will not have any net effect on the fund balance.

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