A bond sinking fund investment is started on January 5, 2010, by transferring $10,000 in cash to the fund. This $10,000 is invested and earns $1,100 during 2010. The entry to record the earnings made on the sinking fund investment includes a debit to _____and a credit to __________.
A. Cash for $1,100; Income from Sinking Fund Investment for $1,100
B. Cash for $1,100; Bond Sinking Fund Investment for $1,100
C. Bond Sinking Fund Investment for $1,100; Income from Sinking Fund Investment for $1,100
D. Cash for $1,100; Interest Income for $1,100
To determine the correct entry to record the earnings made on the sinking fund investment, we need to understand the nature of the sinking fund and the accounting treatment for its earnings.
A sinking fund is a fund set up by a company or government entity to set aside money to repay debt, such as bonds, when they mature. The purpose of the sinking fund is to ensure that there is enough money available to honor the debt obligation when it becomes due.
When funds are transferred to the sinking fund, they are typically invested to earn a return. The earnings from the sinking fund investment need to be recorded in the accounting books.
In this case, $10,000 in cash was transferred to the sinking fund, and it earned $1,100 during 2010. The entry to record the earnings should reflect the increase in the value of the sinking fund investment.
Based on these principles, the correct entry would be:
C. Bond Sinking Fund Investment for $1,100; Income from Sinking Fund Investment for $1,100
Explanation:
- Debit the Bond Sinking Fund Investment account to increase its value by $1,100. This represents the increase in the value of the sinking fund investment.
- Credit the Income from Sinking Fund Investment account to record the earnings made on the sinking fund investment.
Note: Option A suggests debiting Cash for $1,100, which is not appropriate because the cash has already been transferred to the sinking fund. Option B suggests crediting the Bond Sinking Fund Investment for $1,100, which would reduce the value of the investment instead of reflecting the earnings. Option D suggests crediting Interest Income for $1,100, which is not a specific account for recording sinking fund investment earnings.