Question

In: Accounting

Pam retires after 28 years of service with her employer. She is 66 years old and...

Pam retires after 28 years of service with her employer. She is 66 years old and has contributed $94,500 to her employer's qualified pension fund, all of which was taxable when earned. She elects to receive her retirement benefits as an annuity of $9,450 per month for the remainder of her life.

a. Assume that Pam retired in June 2019 and collected six annuity payments that year. What is her gross income from the annuity payments in the first year?

$

b. Assume that Pam lives 25 years after retiring. What is her gross income from the annuity payments in the twenty-fourth year?

$

c. Assume that Pam dies after collecting 160 payments. She collected eight payments in the year of her death. What are Pam's gross income and deductions from the annuity contract in the year of her death?

Income from the annuity payments: $

Loss deduction: $

Solutions

Expert Solution

Answer:-

a) Calculation of the Income from the Annuity Payments in the first year

Particulars

Amount

Total contribution to qualified pension fund (a)

$94,500

Number of anticipated monthly annuity payments (b)

210

Exclusion per payment (a/b)

$450

Collections ($9,450 * 6 Payments)

$56,700

Less:- Exclusion for capital recovery ($450 * 6 Payments)

$2,700

Income from the annuity payments in the first year

$54,000

Therefore, the Income from the Annuity Payments in the first year is $54,000

b) Calculation of the Income from the annuity payments in the Twenty-fourth years

Particulars

Amount

210 Months is Equal to 17 years and 5 Months

Retirement benefits as an Annuity (a)

$9,450

Number of payments in a year (b)

12

Income from the annuity payments in the 24 years (a*b)

$113,400

Therefore, the Income from the annuity payments in the Twenty-fourth years is $113,400

c) Calculation of the Income from the annuity payments and loss deduction

Particulars

Amount

Total amount collected ($9,450 * 160 payments)

$1,512,000

Investment in contract

$94,500

Less:- Capital received ($450 * 160 payments)

$72,000

Loss Deduction ($94,500 - $72,000)

$22,500

Income from the annuity payments [( $9,450*8)-($450*8)]

$72,000

Therefore, the Income from the annuity payments: $72,000

Therefore, the Loss deduction: $22,500

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