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Intermediate Accounting (Kieso)
Found in: Page 301

Short Answer

Question:What are the primary characteristics of an annuity? Differentiate between an “ordinary annuity” and an “annuity due.”

The annuity has periodic payment and rents occur in beginning in annuities due, rents occur at end of the period in an ordinary annuity

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Step by Step Solution

Step-by-Step SolutionStep 1 Characteristics of annuity

An annuity involves the following characteristics:

Periodic payments or receipts called rents,

Of the same amount

Spread over equal intervals

With interest compounded once each interval

Step 2 Difference between an ordinary annuity and annuity due

In ordinary annuities, the rents occur at the end of the intervals but in annuities, due rents occur at beginning of each of the intervals or each time period

Most popular questions for Business-studies Textbooks

Answer each of these unrelated questions.

(a) On January 1, 2017, Fishbone Corporation sold a building that cost $250,000 and that had accumulated depreciation of $100,000 on the date of sale. Fishbone received as consideration a $240,000 non-interest-bearing note due on January 1, 2020. There was no established exchange price for the building, and the note had no ready market. The prevailing rate of interest for a note of this type on January 1, 2017, was 9%. At what amount should the gain from the sale of the building be reported?

(b) On January 1, 2017, Fishbone Corporation purchased 300 of the $1,000 face value, 9%, 10-year bonds of Walters Inc. The bonds mature on January 1, 2027, and pay interest annually beginning January 1, 2018. Fishbone purchased the bonds to yield 11%. How much did Fishbone pay for the bonds?

(c) Fishbone Corporation bought a new machine and agreed to pay for it in equal annual installments of $4,000 at the end of each of the next 10 years. Assuming that a prevailing interest rate of 8% applies to this contract, how much should Fishbone record as the cost of the machine?

(d) Fishbone Corporation purchased a special tractor on December 31, 2017. The purchase agreement stipulated that Fishbone should pay $20,000 at the time of purchase and $5,000 at the end of each of the next 8 years. The tractor should be recorded on December 31, 2017, at what amount, assuming an appropriate interest rate of 12%?

(e) Fishbone Corporation wants to withdraw $120,000 (including principal) from an investment fund at the end of each year for 9 years. What should be the required initial investment at the beginning of the first year if the fund earns 11%?


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