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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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Cash Flow Amounts On December 31, 2026, Michael McDowell wants to have $60,000. He plans to make 6 deposits in a fund to provide this amount. Interest is compounded annually at 12%.

Required:

Compute the equal annual amounts that Michael must deposit assuming that he makes the first deposit on:

  1. 1. December 31, 2021
  2. 2. December 31, 2020

1.

To determine

Determine the equal annual amount required to be deposited, if the first payment is made on December 31, 2021.

Explanation

Future Value: The future value is value of present amount compounded at an interest rate until a particular future date.

Future value of an ordinary annuity can be computed from the following formula:

FVO=C ×(fon,i)

Here,

  • FVO represents future value ordinary annuity
  • i represents interest rate for each of the stated time periods
  • n represents number of time periods
  • C represents Cash flows
  • fO represents factor of future value of ordinary annuity

Determine the equal annual amount required to be deposited, if the first payment is made on December 31, 2021.

If person M makes first deposit on December 31, 2021, then it is considered as an ordinary annuity, because last deposit would be December 31, 2026, and the cash flow occurs during the last day of each time period

2.

To determine

Determine the equal annual amount required to be deposited, if the first payment is made on December 31, 2020.

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