Question

Required information Problem 5-51 (LO 5-2) [The following information applies to the questions displayed below.] Anne purchased an annuity from an insurance company that promised to pay her $25,000 per year for the next 10 years. Anne paid $182,500 for the annuity, and in exchange she will receive $250,000 over the term of the annuity. Problem 5-51 Part-a a. How much of the first $25,000 payment should Anne include in gross income? (Do not round intermediate calculations.) Amount to be included

Answer 1

a.       Income that Anne shall include in his gross income is computed as follows:

= $ 25,000 - $ 182,500 / $ 250,000 x $ 25,000

= $ 6,750

b.      Income that Anne will recognize over the term of the annuity will be

= $ 6,750 x 10

= $ 67,500

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