Question

(1)

On January 1, Alan King decided to deposit $58,800 in a savings account that will provide funds four years later to send his son to college. The savings account will earn 8% annually. Any interest earned will be added to the fund at year-end (rather than withdrawn). (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)

Required:

1. How much will be available in four years?

2. Assume that Alan King follows GAAP. Prepare the journal entry that Alan should make on January 1.

3. What is the total interest for the four years?

4. Assume that Alan King follows GAAP. Prepare the journal entry that Alan should make on December 31 of the first year and December 31 of the second year.

(2)

At the end of each year, you plan to deposit $2,000 in a savings account. The account will earn 9% annual interest, which will be added to the fund balance at year-end. The first deposit will be made at the end of Year 1. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)

Required:

1. Assume you follow GAAP. Prepare the required journal entry at the end of Year 1.

2. What will be the balance in the savings account at the end of the 10th year (i.e., after 10 deposits)?

3. What is the interest earned on the 10 deposits?

4. How much interest revenue did the fund earn in the second year? In the third year?

5. Assume you follow GAAP. Prepare the all required journal entries at the end of the second and third years.

Answer 1

1. a. Future value =Money deposited *FV of $1( 8% ,4) = 58800 * 1.3605 = 79,997

b.

Account titles	Debit	Credit
Investment	58800
Cash		58800

c. Interest = 79997 - 58800 = 21197

d. Interest for year one = 58800*8% = 4704

For year one:

Account Titles	Debit	Credit
Investment	4704
Interest revenue		4704

For year two

Account titles	Debit	Credit
Investment	5080
Interest revenue		5080
[(4704+58800)*8%]

2.

a.

Account titles	Debit	Credit
Savings	2000
Cash		2000

b. Balance after 10 deposits = 2000 * FVAF of $1( 9%, 10 years) = 2000 *15.1929 = 30386

c. Interest earned = 30386- 20000 = 10386

d. Second year = 2000 *9% = 180

Third year = (2000+2000+180) *95 = 376

e. Second year

Account titles	Debit	Credit
Savings	2180
Cash		2000
Interest revenue		180

Third year:

Account titles	Debit	Credit
Savings	2376
Cash		2000
Interest revenue		376