CLASSROOM EXERCISES ON SINKING FUND
PROBLEM 1
Bing Co. set up a sinking fund on January 1, 2020, in preparation for the retirement of its P10,000,000, 7% bonds
payable acquired at face value. The entity records the transactions currently and maintains a balance in the retained
earnings appropriated for sinking fund account to the sinking fund. There is no trustee.
2020:
January 1 Transferred P5,000,000 cash to the sinking fund
March 31 Invested 60% of the fund in P3,000,000, 12% bonds. The bonds were acquired at face
value and pays interest every September 30 and March 31
June 30 Invested P1,000,000 of the fund in Chandler Co. shares.
September 30 Received semi-annual interest on the bonds
December 31 Received P20,000 dividends from Chandler
Accrued interest on the bonds
Transferred another P7,000,000 to the sinking fund
Paid interest on the bonds using available cash in sinking fund
Appropriated retained earnings equal to the balance of the sinking fund
2021:
January 1 Paid custodian fee, P50,000
March 31 Received interest on the bonds
September 30 Received interest on the bonds
December 31 Received the annual dividends from Chandler, P20,000
Accrued interest on the bonds
Paid interest on the bonds using available cash in sinking fund
Appropriated retained earnings equal to the balance of the sinking fund
2022:
January 1 Paid custodian fee, P50,000
March 31 Received interest on the bonds
September 30 Sold the bonds at 105 after receiving the semi-annual interest
Sold Chandler’s shares for P1,080,000
December 31 Retired the bonds, plus annual interest
Returned the residual sinking fund cash to the general cash fund
Reversed the appropriation in the retained earnings
Prepare the journal entries from 2020 to 2022.
PROBLEM 2
The following pieces of information relates to Tribianni Corp.’s sinking fund, which was administered by a trustee.
1. Contributed cash to the fund, P4,000,000.
2. Acquired securities at par by the trustee, P3,000,000. Securities bear interest of 9% paid semi-annually.
3. Trustee receives semi-annual interest on securities.
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4. Trustee pays expenses of P80,000.
5. Trustee sells the securities for P3,400,000, excluding accrued interest of P67,500.
6. The trustee renders a report to the entity.
7. The trustee renders a report to the entity stating that bonds payable of P4,000,000 and interest of P100,000.
8. Trustee remits the remaining cash to the entity.
Prepare the necessary journal entries.
PROBLEM 3
The bond indenture of Green Inc., which was finalized on January 1, 2020 (coinciding with the date of the issuance
of the bonds), requires an accumulation of fund amounting to P80,000,000 on December 31, 2025. Contribution to
the fund, which earns 10% annually, is to be made semi-annually every January 1 and July 1.
Compute the semi-annual contribution to the fund as well as the schedule of the fund accumulation given the
following independent assumptions:
1. The first semi-annual contribution is made on June 30, 2020.
2. The first semi-annual contribution is made on January 1, 2020.
PROBLEM 4
Geller Co. adopted a plan to accumulate fund for environmental improvement beginning January 1, 2020 at an
estimated cost of P50,000,000. The entity plans to make a one-time contribution to the fund that will earn interest at
12% compounded annually. The company plans to disburse the amount on December 31, 2024.
Compute the contribution to the fund as well as the schedule of the fund accumulation given the following
independent assumptions:
1. The contribution was made on December 31, 2020.
2. The contribution was made on January 1, 2020.
PROBLEM 5
The following information relates to a bond sinking fund that Perry Co. placed in trust as required by the
underwriter:
Bond sinking fund, January 1, 2020 12,000,000
Additional investment in 2020 2,500,000
Dividends on investment 500,000
Interest revenue 750,000
Administration costs 250,000
Carrying amount of bonds payable 20,000,000
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What is the carrying amount of the bond sinking fund on December 31, 2020?
PROBLEM 6
On January 1, 2020, Schwimmer Inc. adopted a plan to accumulate P60,000,000 by December 31, 2029. A certain
fund earns annual interest of 10% Compute for the regular contribution to be made by the entity as well as the
balance of the fund at the end of 2024 given the following independent assumptions:
1. The first annual payment was made on December 31, 2020.
2. The first semi-annual payment was made on January 1, 2020.
3. A one-time contribution was made on December 31, 2020.
4. A one-time contribution was made on January 1, 2020.
PROBLEM 7
Ross Inc. borrowed P10,000,000, with a plan to repay the whole amount in 12 years. The loan bears an interest of
12% payable every June 30 and December 31. Ross’s loan will be repaid by making deposits every June 30 and
December 31 that earns 10% compounded semi-annually.
How much is the total semi-annual payment to be made by Ross?
June 2020
