Retirement of Bonds and Sinking Fund
Accounting for Retirement of Bonds
No problems arise with discounts or premiums because they have been amortized to zero by the time of the last interest payment just prior to maturity.
This is a collection of cash or other assets (e.g., marketable securities) that is set apart from the firm’s other assets and is used only for a specified purpose.
The issuing corporation makes periodic payments to its bond sinking fund. These monies are then invested by the trustee and eventually are used to pay the interest and principal of the bond.
The number of periodic payments to the fund is based on the expected return that the trustee can earn on the assets in the fund.
The sinking fund is shown under the investment section on the balance sheet of the issuing corporation. The accounting procedure regarding interest expense recognition and other aspects of bonds is not affected by the existence of a bond sinking fund.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.