| (10) First Mortgage 6% Bonds | $..... | |
| Sinking Fund Cash in Hands of Trustee | $..... |
Here the item of premium or discount is usually to be found and the question then arises as to whether the item is not better handled as a charge or credit direct to Sinking Fund Reserve rather than through the current profit and loss.
Final Disposition of Fund
There remain to be considered the entries recording the payment of the bonds at maturity and the disposition of all sinking fund accounts. The securities of the trustee must be reconverted into cash to be used for redeeming the bonds, often resulting in a difference between the book value of securities and the actual amount realized therefrom. This must be adjusted by charge or credit to the Sinking Fund Reserve. After cancellation of all the bonds, any cash balance is turned back by the trustee to the company. The entries on the books would be:
| (11) Sinking Fund Cash in Hands of Trustee | $..... | ||
| Sinking Fund Investments | $..... | ||
| To record sale of securities in the sinking fund. | |||
| (12) Sinking Fund Reserve | ..... | ||
| Sinking Fund Investments | ..... | ||
| or | |||
| (13) Sinking Fund Investments | ..... | ||
| Sinking Fund Reserve | ..... | ||
| To adjust the difference between book and realized values of the securities. | |||
| (14) First Mortgage 6% Bonds | ..... | ||
| Sinking Fund Cash in Hands of Trustee | ..... | ||
| To record redemption of all bonds. | |||
| (15) Cash | ..... | ||
| Sinking Fund Cash in Hands of Trustee | ..... | ||
| To record transfer to company of cash balance in hands of trustee. | |||
Treatment of Sinking Fund Reserve
Only the Sinking Fund Reserve account now remains on the books. Having served its purpose of providing funds by retaining profits in the business for the redemption of the bond issue, resulting in an addition to the net worth of the business, this reserve is now free to be used as deemed best. It may be thrown into surplus and so become available for dividend purposes; or it may be used as the basis for an increase in capital stock and be distributed as a stock dividend, thus making the increase in net worth permanent. The following entries respectively accomplish these ends:
| (16) Sinking Fund Reserve | $..... | |
| Surplus | $..... | |
| (17) Surplus | ||
| Stock Dividend Payable | ||
| (18) Stock Dividend Payable | ||
| Capital Stock |
Relation between Depreciation and Sinking Fund
A final problem deals with the relation between depreciation and the sinking fund. If the trust agreement requires that a sinking fund reserve shall be created by charge against profits, must provision be made also for the depreciation of the mortgaged property held as security for the bonds? The fact of depreciation is omnipresent and cannot be escaped. Also, the trust agreement must be lived up to. To carry out both requirements simultaneously would manifestly result in a double charge. The charge for depreciation is an expense charge which must be made before net profits can be determined. The charge for the creation of the sinking fund reserve is against surplus, i.e., it takes effect after the determination of net profits. Theoretically, therefore, the provision for depreciation must be made, else true profits cannot be determined. Equally certain must be the provision for the sinking fund reserve. Authorities seem to agree that not only is there no need for provision for both but that to provide for both places an unnecessary burden on the stockholders during the periods of the creation of the sinking fund.