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Chapter 6: Q2Q (page 301)

Question:Identify three situations in which accounting measures are based on present values. Do these present value applications involve single sums or annuities, or both single sums and annuities? Explain.

Short Answer

Expert verified

The situation in which present value measures are used in accounting includes:

Notes receivables and payable

Leases

Pensions and another deferred compensation arrangement

These involve the single sum transaction.

Step by step solution

01

Step-by-Step SolutionStep 1 Various situations which are based on the present value

There are various situations in which accounting measures are based on present values.

Notes Receivables and Payables: It includes present value annuities, when there are periodic interest payments are involved.

Leases: It involves the measurement of assets and obligations which are usually based on the present value of annuities.

Pensions and another deferred compensation arrangement: It involves the discounted future annuity payments that are paid to the employees on their retirement.

02

Step 2Single sum transactions

The notes receivables and payables involve single sums and leases also involve single sums.

Single sums refer to that single amount of money that either exists now or will exist in the future.

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Most popular questions from this chapter

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You have been hired as a benefit consultant by Jean Honore, the owner of Attic Angels. She wants to establish a retirement plan for herself and her three employees. Jean has provided the following information. The retirement plan is to be based upon annual salary for the last year before retirement and is to provide 50% of Jean’s last-year annual salary and 40% of the last-year annual salary for each employee. The plan will make annual payments at the beginning of each year for 20 years from the date of retirement. Jean wishes to fund the plan by making 15 annual deposits beginning January 1, 2017. Invested funds will earn 12% compounded annually. Information about plan participants as of January 1, 2017, is as follows.

Jean Honore, owner: Current annual salary of \(48,000; estimated retirement date January 1, 2042.

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Gavin Bryars, part-time bookkeeper: Current annual salary of \)15,000; estimated retirement date January 1, 2032.

In the past, Jean has given herself and each employee a year-end salary increase of 4%. Jean plans to continue this policy in the future.

Instructions

(a) Based upon the above information, what will be the annual retirement benefit for each plan participant? (Round to the nearest dollar.) (Hint: Jean will receive raises for 24 years.)

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