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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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Future Value of Single Investment and Annuity Jane Dough was a teller in a large northeastern bank. She was single and approaching age 30, and she considered herself an honest and upright citizen. After considering what she might do to build a retirement plan for the future, she decided to embezzle $1,500,000. Subsequently, she gave herself up to the authorities but did not return the $1,500,000. She was tried, convicted, and sentenced to 20 years in prison. After completing her 20-year term, she returned the $1,500,000 that she had stolen. She then decided to take a world cruise. On the ship, someone asked her how she had accumulated enough money to afford the trip. She replied, “Do you know how much interest $1,500,000 will earn in 20 years if invested at an annual rate of 16% compounded quarterly?”

Required:

  1. 1. Determine the answer to Fane’s question. The table factor for fn = 40, i = 4% is 4.801021.
  2. 2. Evaluate Jane’s retirement decision, assuming that she could have earned $140,000 each year for each of the 20 years she was in prison. Assume that $40,000 is required each year to cover living expenses and that she could have invested the remaining $100,000 at the end of each year to earn interest at 16% compounded annually.

1.

To determine

Determine the amount of interest earned.

Explanation

Present value:

The value of today’s amount to be paid or received in the future at a compound interest rate is called as present value.

Interest is compounded quarterly; hence number of period (n) is taken as 80 (20 years×4) and interest rate (i) is taken as 4%(16%4).

Calculate the future amount of investment using future value formula.

Future value = Present value ×(fn=80,i=4%)=Present value×(f

2.

To determine

Evaluate Person J’s retirement decision.

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