Question

Fox Publishers offered a contest in which the winner would receive $1,000,000, payable over 20 years. On December 31, 2018, Fox announced the winner of the contest and signed a note payable to the winner for $1,000,000, payable in $50,000 installments every January 2. Also on December 31, 2018, Fox purchased an annuity for $418,250 to provide the $950,000 prize monies remaining after the first $50,000 installment, which was paid on January 2, 2019. In its 2018 income statement, what should Fox report as contest prize expense?

Group of answer choices

$0

$1,000,000

$468,250

$418,250

Answer 1

In its 2018 income statement , fox will report as contest prize expense as:

$418250 because this annuity is purchased in 2018 for the purpose of payment of prize. If this annuity is purchased in 2019 then cost will $0 in 2018.