Multiple choice

Directions: Choose the correct option for the given question.

When sinking fund exists, interest on own debenture will be transferred to

  1. profit and loss account

  2. sinking fund account

  3. either (1) or (2)

  4. none of these
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

When a company has created a sinking fund for debenture redemption, and it purchases some of its own debentures from the open market, any interest received on those debentures is reinvested in the sinking fund. Since the sinking fund is already accumulating for the specific purpose of debenture redemption, the interest earned on own debentures (which are effectively held for redemption) is transferred to the Sinking Fund Account. This increases the fund balance and reduces the ultimate burden on the company at redemption time. It is not taken to Profit and Loss Account as it's capital in nature.

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