Entries to Sinking Fund
Accounting for the sinking fund presents nothing new in principle. There are, in the main, three kinds of entries to be made, viz.:
1. Those dealing with the original and subsequent periodic payments into the fund.
2. Those required to book the trustee’s periodic report of his handling of the fund.
3. Those to show the redemption of the debt and the final disposition of the accounts relating to the fund.
In the illustration, for the sake of definiteness, it will be assumed that the governing financial policy is the second one discussed above, according to which not only is a sinking fund created but also an equal amount of profits is reserved each period; that the funds are placed in the hands of a trustee for investment and that any income from the investments is to go into the fund; and that it is desired to show both the investments of the trustee and the unexpended balance of cash in his possession. The account titles are suggestive only, many varying titles being used. The entries required to show the original payments into the fund are:
| (1) Sinking Fund Cash in Hands of Trustee | $..... | ||
| Cash | $..... | ||
| To record payment to trustee of first payment into the sinking fund created according to terms of trust agreement to retire the first mortgage 6% bonds. | |||
| (2) Surplus | ..... | ||
| Sinking Fund Reserve | ..... | ||
| To show the creation of a reserve to provide funds for the redemption of bonds. | |||
Subsequent payments into the fund would be recorded in exactly the same way as the original payments.
Booking the Trustee’s Report
Upon receipt of the trustee’s report on the handling of the fund, entries must be made to bring a summary of the report onto the books. This report should cover a full accounting of the funds turned over to the trustee, his investment of them, all expenses of the trust, and any income received or accrued. The funds may be left for accretion in a savings bank; they may be used to purchase high-grade securities; or with them the very bonds which they are to redeem may be bought and canceled immediately, or allowed to run, the interest accretions going into the fund also. Securities for investment may be bought at a premium or a discount. Expenses will be incurred by way of commission or salary for the trustee, expenses of the trust, advertising, brokers’ commission, etc.; and income will be received by the trustee from the securities held and even from the unexpended balance of cash.