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AccountingIntermediate Accounting: Reporting And Analysis3rd Edition

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Chapter M, Problem 3C
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Intermediate Accounting: Reporting...

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

Solutions

Chapter
Section
Problem 1GI
Problem 2GI
Problem 3GI
Problem 4GI
Problem 5GI
Problem 6GI
Problem 7GI
Problem 8GI
Problem 9GI
Problem 10GI
Problem 11GI
Problem 12GI
Problem 13GI
Problem 14GI
Problem 15GI
Problem 16GI
Problem 17GI
Problem 18GI
Problem 19GI
Problem 20GI
Problem 21GI
Problem 22GI
Problem 23GI
Problem 24GI
Problem 25GI
Problem 26GI
Problem 1MC
Problem 2MC
Problem 3MC
Problem 4MC
Problem 5MC
Problem 6MC
Problem 7MC
Problem 8MC
Problem 9MC
Problem 10MC
Problem 1RE
Problem 2RE
Problem 3RE
Problem 4RE
Problem 5RE
Problem 6RE
Problem 7RE
Problem 8RE
Problem 9RE
Problem 10RE
Problem 11RE
Problem 12RE
Problem 13RE
Problem 14RE
Problem 1E
Problem 2E
Problem 3E
Problem 4E
Problem 5E
Problem 6E
Problem 7E
Problem 8E
Problem 9E
Problem 10E
Problem 11E
Problem 12E
Problem 13E
Problem 14E
Problem 1P
Problem 2P
Problem 3P
Problem 4P
Problem 5P
Problem 6P
Problem 7P
Problem 8P
Problem 9P
Problem 10P
Problem 11P
Problem 12P
Problem 13P
Problem 14P
Problem 15P
Problem 16P
Problem 17P
Problem 18P
Problem 19P
Problem 1C
Problem 2C
Problem 3C
Problem 4C
Problem 5C
BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Cost of Insurance Plans

Johnson Company is considering three different time periods for an insurance policy on its main office building. The premiums on a fire insurance policy covering the building for the amount of $2,000,000 on a 1-year, 3-year, and 5-year basis are as follows:

Chapter M, Problem 3C, Cost of Insurance Plans Johnson Company is considering three different time periods for an insurance

In each case, the entire premium for the full term of the policy is payable at the beginning of the year in which the policy is purchased.

Required:

Evaluate the present value of the annual cost of each insurance plan assuming a 12% compounded annual discount rate. Which plan do you recommend? State the savings for the company.

To determine

Determine the present value of annual cost for each insurance plan, and identify the plan which can be recommended.

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.

Plan 1:

Annual cost of 1-year insurance plan is $4,480.

Plan 2:

Determine the annual cost of 3-year insurance plan, using the present value of annuity due formula, because the premium amount is payable at the beginning of each period.

PVD=Cash flow×(pDn,i)$11,200=Cash flow ×(pDn=3,i=12%)$11,200=Cash flow  ×2.690051Cash flow=$11,2002.690051

Cash flow=$4,163.49

The, annual cost of 3-year insurance plan is $4,163.49.

Plan 3:

Determine the annual cost of 5-year insurance plan, using the present value of annuity due formula, because the premium amount is payable at the beginning of each period

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Ch-M P-1GICh-M P-2GICh-M P-3GICh-M P-4GICh-M P-5GICh-M P-6GICh-M P-7GICh-M P-8GICh-M P-9GICh-M P-10GI
Ch-M P-11GICh-M P-12GICh-M P-13GICh-M P-14GICh-M P-15GICh-M P-16GICh-M P-17GICh-M P-18GICh-M P-19GICh-M P-20GICh-M P-21GICh-M P-22GICh-M P-23GICh-M P-24GICh-M P-25GICh-M P-26GICh-M P-1MCCh-M P-2MCCh-M P-3MCCh-M P-4MCCh-M P-5MCCh-M P-6MCCh-M P-7MCCh-M P-8MCCh-M P-9MCCh-M P-10MCCh-M P-1RECh-M P-2RECh-M P-3RECh-M P-4RECh-M P-5RECh-M P-6RECh-M P-7RECh-M P-8RECh-M P-9RECh-M P-10RECh-M P-11RECh-M P-12RECh-M P-13RECh-M P-14RECh-M P-1ECh-M P-2ECh-M P-3ECh-M P-4ECh-M P-5ECh-M P-6ECh-M P-7ECh-M P-8ECh-M P-9ECh-M P-10ECh-M P-11ECh-M P-12ECh-M P-13ECh-M P-14ECh-M P-1PCh-M P-2PCh-M P-3PCh-M P-4PCh-M P-5PCh-M P-6PCh-M P-7PCh-M P-8PCh-M P-9PCh-M P-10PCh-M P-11PCh-M P-12PCh-M P-13PCh-M P-14PCh-M P-15PCh-M P-16PCh-M P-17PCh-M P-18PCh-M P-19PCh-M P-1CCh-M P-2CCh-M P-3CCh-M P-4CCh-M P-5C

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