HOMEWORK ON SINKING FUND

Problem 1

Naomi Co. records sinking fund transactions currently and maintains a balance in the retained earnings
appropriated for sinking fund account equal to the sinking fund. There is no trustee. The following
transactions relate to the company’s sinking fund set up for the retirement of its long-term bonds payable.

1. In accordance with the terms of the bond indenture, cash in the amount of P20,000,000 is transferred
at the end of the first year, from the regular cash account to the sinking fund.
2. The sinking fund cash is used to acquire Drake Corp.’s 12%, five-year bonds of 5,000,000 at face
value.
3. The sinking fund cash is used to acquire 10% P50 par value Mozaki Inc. 100,000 preference shares at
P80 per share.
4. Semi-annual interest is received on the Drake bonds.
5. Sinking fund expenses of P200,000 are paid from the fund.
6. This sinking fund cash is used to acquire WeMo Co. 10% bonds of P4,000,000, maturing in 4 years at
face value plus six months accrued interest.
7. Half of the Mozaki shares were sold for P100 per share after the receipt of the annual dividends.
8. Interest is received on WeMo bonds, including the accrued interest at the time of purchase.
9. The WeMo bonds were sold for 99. No interest was accrued at the time of sale.
10. Retained earnings are appropriated in the amount equal to the sinking fund balance.

Prepare the journal entries to record the transactions.

Problem 2

The following information relates to a bond sinking fund that Sami’s Co. placed in trust as required by the
underwriter:

Bond sinking fund, January 1, 2021 9,000,000

Additional investment in 2021 1,800,000
Dividends on investment 300,000
Interest revenue 600,000
Administration costs 100,000
Carrying amount of bonds payable 15,000,000

What is the carrying amount of the bond sinking fund on December 31, 2021?
Problem 3

On January 1, 2021, Danes Inc. adopted a plan to accumulate P10,000,000 by December 31, 2023. A
certain fund earns annual interest of 8%.

Compute for the regular contribution to be made by the entity as well as the balance of the fund at the
end of 2023 given the following independent assumptions:

1. The first annual payment was made on December 31, 2021.

2. The first annual payment was made on January 1, 2021.
3. A one-time contribution was made on December 31, 2021.
4. A one-time contribution was made on January 1, 2021.

Problem 4

Sarai Inc. borrowed P5,000,000, with a plan to repay the whole amount in 10 years. The loan bears an
interest of 8% payable every June 30 and December 31. Sarai’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 Sarai?

June 2021