A company issued 5,000 debentures of Rs. 100 each at par on 1.1.2019 redeemable at par on 31.12.2023. A sinking fund was established for the purpose. It was expected that investment would earn 5% interest. Sinking Fund Table shows that Rs. 0.180975 amounts to Rs. 1 at the end of 5 years at 5%. On 31.12.2023, the investments realized Rs. 3,90,000. The debentures were duly redeemed. Prepare Sinking Fund Account for 5 years.
Answer (2)
To create a Sinking Fund Account for the redemption of debentures, we need to systematically save a certain amount each year which, along with the interest earned, will be sufficient to redeem the debentures.
Determine the annual sinking fund contribution: Given that at the end of 5 years, Rs. 0.180975 grows to Rs. 1, we need to find how much must be saved each year. Since the total value of debentures is Rs. 5,00,000 (5,000 debentures × Rs. 100 each), we can calculate the annual contribution as follows:
Annual Sinking Fund Contribution = 0.180975 5 , 00 , 000 = 90 , 487.08
Since exact amounts can be slightly off due to rounding or table interpretation, this is an approximation.
Prepare the Sinking Fund Account for 5 years:
Each year, contribute the calculated annual amount.
Accumulate interest at 5% per annum on the Sinking Fund's opening balance.
The Sinking Fund Account would look as follows:
YearContributionInterestClosing Balance201990,487.08---90,487.08202090,487.084,524.351,85,498.51202190,487.089,274.922,85,260.51202290,487.0814,263.033,89,510.62202390,487.0819,475.534,99,473.23
Note: The interest for each year is 5% of the previous year's closing balance, and the closing balance is the sum of the contribution and interest.
Realization and Redemption:
On 31.12.2023, the investments realized Rs. 3,90,000.
The debentures worth Rs. 5,00,000 were redeemed using the available sinking fund. Since the sinking fund account balance does not exactly match the face value of debentures due to the realization amount being slightly less, adjustments would typically be made by the company from other reserves or profits.
This detailed procedure ensures proper planning and execution of debenture redemption through an established sinking fund.
The Sinking Fund Account is prepared to ensure the company can redeem Rs. 500,000 worth of debentures by making annual contributions. The annual sinking fund contribution is approximately Rs. 90,487.08, which, along with interest earned, grows to be sufficient by the end of the 5-year period. Ultimately, Rs. 390,000 was realized, and adjustments may be needed for the full redemption amount.
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