As to the purchase of securities at a premium or discount, the problem involved is the proper handling of the premium or discount. Theoretically, whether in the hands of a trustee or under own control, premiums and discounts on securities bought for long-term investment should be amortized. The reader is referred to [Chapter XV, page 267], for the various methods of booking such investments. Oftentimes, however, the premium is charged at once against the sinking fund income along with all other expenses.
To book the investments of the trustee, the entries needed are:
| (3) Sinking Fund Investments | $..... | ||
| Sinking Fund Cash in Hands of Trustee | $..... | ||
| (List here the securities purchased and their price.) | |||
| (4) Sinking Fund Expenses | ..... | ||
| Sinking Fund Cash in Hands of Trustee | ..... | ||
| (Itemize here all expenses chargeable against the fund or its income.) | |||
| (5) Sinking Fund Cash in Hands of Trustee | $..... | ||
| Sinking Fund Income | $..... | ||
| (Record here the income from interest on unexpended cash balance and from securities, with proper adjustments on account of amortization of premium or discount.) | |||
Treatment of Income and Expense
Practice varies as to the proper handling of the income and expense of the sinking fund. Sometimes they are treated as affecting—i.e., increasing or decreasing—only the sinking fund reserve and as having no place in the current profit and loss. That seems a mistaken view; the fact that the investment is beyond the company’s control none the less renders its income and expense a fact of current profit and loss, and it should be so shown. Accordingly, the sinking fund expense and income accounts above should be closed into profit and loss, after which their net result will be transferred from surplus to Sinking Fund Reserve, to show the net increment or decrement as a result of the trustee’s operations. Thus:
| (6) Sinking Fund Income | $..... | |
| Profit and Loss | $..... | |
| (7) Profit and Loss | ||
| Sinking Fund Expenses | ||
| (8) Profit and Loss | ||
| Surplus |
Entry (8) is not strictly a sinking fund entry but transfers the entire balance of the period’s profit and loss to surplus, out of which the net increment or decrement of the sinking fund operations is transferred to Sinking Fund Reserve by entry (9):
| (9) Surplus | $..... | |
| Sinking Fund Reserve | $..... |
An amount equal to the compound interest increment must always be transferred to the reserve, if accurate results are desired.
Practically the same entries will serve if the investments are the company’s own bonds. If the bonds are canceled, instead of entry (3) the following entry would be made: