— Kishore V, SME and ACW at Edumarz
The steps involved in the creation of the Sinking Fund on the redemption of Debenture are.
(i) Calculate the amount of profit to be set aside annually with the help of a sinking fund table.
(ii) Set aside the amount of profit at the end of each year and credit it to Debenture Redemption Fund (DRF) Account.
(iii) Purchase the investments of the equivalent amount at the end of the first year and debit the Debenture Redemption Fund Investment (DRFI) Account.
(iv) Receive interest on investment at the end of each subsequent year.
(v) Purchase the investments equivalent to the fixed amount of profit set aside and the interest earned every year except last year (year of redemption).
(vi) Receive Interest on investment for the last year.
(vii) Set aside the fixed amount of profit for the last year.
(viii) Encash the investments at the end of the year of redemption.
(ix) Transfer the profit/loss on the sale of investments reflected in the balance of the Debenture Redemption Fund Investment Account to the debenture Redemption Fund Account.
(x) Make payment to debenture holders.
(xi) Transfer Debenture Redemption Fund A/c balance to General Reserve.