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Questions and Answers
What is a bond sinking fund?
What is a bond sinking fund?
Trustee fund that a company contributes money to each year to be able to pay bonds at maturity.
What is the classification of a bond sinking fund on the balance sheet?
What is the classification of a bond sinking fund on the balance sheet?
Non-current restricted cash.
What components make up the sinking fund balance?
What components make up the sinking fund balance?
- Amount of accumulated deposits 2) Interest/dividend earned.
Periodic payments are calculated by dividing the face amount by the _____ of an annuity rate.
Periodic payments are calculated by dividing the face amount by the _____ of an annuity rate.
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What do you need to determine which future value of an annuity of $1 to use?
What do you need to determine which future value of an annuity of $1 to use?
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Study Notes
Bond Sinking Fund Overview
- A bond sinking fund is a trustee-managed account where a company deposits money annually.
- The purpose is to accumulate funds to ensure bonds can be paid at maturity.
Financial Reporting
- Bond sinking funds are classified on the balance sheet as non-current restricted cash.
- This classification indicates that the funds are not readily available for general business use.
Sinking Fund Balance Details
- The sinking fund balance consists of accumulated deposits made by the company.
- Interest or dividends earned on the deposited amount also contribute to the balance.
Calculating Periodic Sinking Fund Payments
- Periodic sinking fund payments can be calculated using the future value of an annuity formula.
- The formula for periodic payments is the face amount of the bond divided by the future value of annuity rate.
Determining Future Value of Annuity
- To select the correct future value of an annuity of $1, ascertain the total number of payments that will be made.
- Calculate the interest rate by dividing it by the number of payments made annually.
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Description
This quiz covers the key concepts of bond sinking funds, including their purpose, financial reporting classifications, and how to calculate periodic payments. Test your understanding of how these funds are managed and reflected in financial statements.
