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Intermediate Accounting (Kieso)
Found in: Page 311

Short Answer

The Procter & Gamble Company (P&G)

The financial statements of P&G are presented in Appendix B. The company’s complete annual report, including the notes to the financial statements, is available online.

Instructions (a) Examining each item in P&G’s balance sheet, identify those items that require present value, discounting, or interest computations in establishing the amount reported. (The accompanying notes are an additional source for this information.)

(b) (1) What interest rates are disclosed by P&G as being used to compute interest and present values?

(2) Why are there so many different interest rates applied to P&G’s financial statement elements (assets, liabilities, revenues, and expenses)?

The financial items are assets like pension assets. Credit risk and interest rate curves are used.

See the step by step solution

Step by Step Solution

Step 1: Financial statement items

The financial statement items requiring present value, discounting, and interest computation is certain assets like pensions, leases, liabilities, revenues, and expenses.

Step 2: Interest rate used

1 Credit risk and interest rate curves are used by the P&G to compute various interest and present values in notes to accounts

2 There are many interest rates applied to various balance sheets and income statement items. All items have different natures; some require compound interest, some require present value factor, and some require future value factor.

Most popular questions for Business-studies Textbooks

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.

Colin Davis, flower arranger: Current annual salary of $36,000; estimated retirement date January 1, 2047.

Anita Baker, sales clerk: Current annual salary of $18,000; estimated retirement date January 1, 2037.

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.)

(b) What amount must be on deposit at the end of 15 years to ensure that all benefits will be paid? (Round to the nearest dollar.)

(c) What is the amount of each annual deposit Jean must make to the retirement plan?

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