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CS Executive · Corporate Accounting and Financial Management · Accounting for Debentures

Kaveri Industries Ltd has Rs 5,00,000 debentures to redeem after 5 years. It sets aside Rs 1,00,000 at each year end and invests it immediately at 6% p.a. in outside securities, and the interest is reinvested. The first contribution is made at the end of year 1. What is the sinking fund balance at the end of year 3, after that year's contribution and interest?

The balance is Rs 3,18,360. Year 1 gives Rs 1,00,000. Year 2 adds Rs 6,000 interest and Rs 1,00,000, giving Rs 2,06,000. Year 3 adds interest of Rs 12,360 on that balance plus the Rs 1,00,000 contribution.

  1. ARs 3,18,360Correct
  2. BRs 3,12,360
  3. CRs 3,00,000
  4. DRs 3,12,000

Explanation

At the end of year 1 the balance is Rs 1,00,000. In year 2 the interest is 6% of 1,00,000 = 6,000, so the balance becomes 1,00,000 + 6,000 + 1,00,000 = Rs 2,06,000. In year 3 the interest is 6% of 2,06,000 = 12,360, so the balance is 2,06,000 + 12,360 + 1,00,000 = Rs 3,18,360. Rs 3,12,360 omits the year 2 interest.

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