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
I think the answer may be c
To determine the correct answer, we need to understand the concept of a sinking fund and how the earnings from the investment are recorded.
A sinking fund is a fund set up by a company or organization to accumulate money over time for the purpose of repaying a debt or meeting future financial obligations. In this case, the sinking fund investment is used to repay a bond.
When the $10,000 cash is transferred to the sinking fund on January 5, 2010, the entry should be:
Debit: Bond Sinking Fund Investment (to increase the investment balance)
Credit: Cash (to record the cash transfer)
During 2010, the sinking fund investment earns $1,100 in income. To record this earnings entry, it should be:
Debit: Bond Sinking Fund Investment (to decrease the investment balance)
Credit: Income from Sinking Fund Investment (to record the earnings)
Based on this understanding, let's consider the options given:
A. Cash for $1,100; Income from Sinking Fund Investment for $1,100
This option incorrectly records the cash as an expense rather than an investment and doesn't properly identify the source of the income.
B. Cash for $1,100; Bond Sinking Fund Investment for $1,100
This option incorrectly records the cash as an expense rather than an investment, and the credit should be for the income earned rather than increasing the investment balance.
C. Bond Sinking Fund Investment for $1,100; Income from Sinking Fund Investment for $1,100
This option is the correct answer. It correctly identifies that the investment should be decreased by the income earned and properly records the income in a separate account.
D. Cash for $1,100; Interest Income for $1,100
This option incorrectly records the cash as an expense rather than an investment, and the credit should be for the income earned rather than categorizing it as "interest income."
Therefore, the correct answer is C.
Note: It's always a good practice to consult accounting standards or verify with an accountant for specific situations or contexts.