Solutions For 2014 FASB Update Intermediate Accounting Chapter 6 Problem 6E

(b)

SW started sinking fund by putting $600,000 at the end of each year for 15 years at 10% discount rate to discharge its liability of 20 million we have to find out the deficiency if any to discharge its liability.

As it is the case of ordinary annuity (same amount, equal interval and at the end of each year) hence future value of ordinary annuity can be calculated using following formula:

Calculate Future value interest factor of ordinary annuity:

Note: you can also use table (6-3) for future value interest factor of ordinary annuity

(c)

President RW has two choices whether to accept immediate bonus of $40,000 or deferred bonus of $70,000 payable in 10 years at 8%discount rate.

To make choice between two alternatives he should compare the value of immediate bonus with present value of deferred bonus and then select the option with higher value.

Calculate the present value of deferred bonus we use the following formula:

To calculate present value interest factor (PVIF_n,r) we use the following formula:

(Note: You can also use table (6-2) of present value interest factor of one)

As immediate bonus is more than the present value of deferred bonus of $70,000 therefore president should accept immediate bonus of $40,000.