Question -
Answer -
Following steps are involved:
1. Calculate the amount from profit that needs to be set aside every year with information obtained from Sinking Fund Table.
2. This amount that is set aside every year in Step 1 is transferred to a Debenture Redemption Fund (Sinking Fund) by debiting P & L Appropriation Account.
3. The instalment hence determined is invested to obtain amount essential for redeeming the debenture by debiting the DRF (Debenture Redemption Fund).
4. The interest on the amount thus invested will be received on bi-annual or annual basis.
5. The total investment which includes investment and the interest is re-invested in the following year.
6. Repeat the steps of transferring and investing till the last instalment which will be debited from P & L appropriation account.
7. The investment is sold off at the year of redemption
8. The profit/loss that is obtained from the sale of investment is transferred appropriately by debiting/crediting Debenture Redemption Fund (DRF) investment account to the DRF Account.
9. Payment is processed for the holders of debenture
10. The balance remaining, if any, from the DRF Account is transferred to the General Reserve.