Problem: Gordon Company issued $1,000,000, 10-year bonds and agreed to make annual sinking fund deposits of $80,000. The deposits are made at the end of each year into an account paying 5% annual interest. What amount will be in the sinking fund at the end of 10 years?
80,000 is deposited each year for ten years and 5% of 80,000? Which is 4,000 so, is this right?
Fund dep. Interest Total
Year 1 80,000 4,000 84,000
Year 2 80,000 4,200(5% of 84,000) 168,200
Year 3 80,000 8,410(5% of 168,200) 256,610
Before I go any further, should I be adding the 80,000 to the total before I calculate the 5% interest of just calculate the 5% on the total from the previous year. Also, does the term “sinking fund” mean something special? Please advise me if I’m on the right track here.