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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Compound Interest Issues You are given the following situations:

  1. 1. Thomas Petty owes a debt of $7,000 from the purchase of a boat. The debt bears 12% interest payable annually. Thomas will pay the debt and interest in 5 annual installments beginning in 1 year. Calculate the equal annual installments that will pay off the debt and interest at 12% on the unpaid balance.
  2. 2. On January 1, 2019, John Cothran offers to buy Ruth House’s used tractor and equipment for $4,000 payable in 12 equal semiannual installments which are to include payment of 10% interest on the unpaid balance and payment of a portion of the principal with the first installment to be made on January 1, 2019. Calculate the amount of each of these installments.
  3. 3. Nadine Love invests in a $60,000 annuity at 12% compounded annually on March 1, 2019. The first of 15 receipts from the annuity is payable to Love on March 1, 2029, 10 years after the annuity is purchased and on the date Love expects to retire. Calculate the amount of each of the 15 equal annual receipts.

Required:

Using the appropriate tables, solve each of the preceding situations.

1.

To determine

Determine the equal annual installments.

Explanation

Annuity: An annuity is referred as a sequence of payment of fixed amount of cash flows that occurs over the equal intervals of time.

Cash flow occurs during the first day of each time period is known as an annuity due, whereas cash flow occurs during the last day of each time period is known as an ordinary annuity.

Deferred ordinary annuity:

It is an ordinary annuity where the first cash flow of an annuity would begin at a future date.

Determine the amount of equal annual installment.

Present value (PVO) – $7,000 cost of boat

Interest rate (i) – 12% compounded annually

Number of period (n) – 5 annual installments (principal and interest) beginning in 1 year.

PVO=Cash flow×(pOn,i)$7<

2.

To determine

Determine the amount of equal installments.

3.

To determine

Determine the amount of each of the 15 equal annual receipts.

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