1.
Identify the amount that will be available in the four years.
1.
Explanation of Solution
Future value:
The future value is value of present amount compounded at an interest rate until a particular future date.
Identify the amount that will be available in the four years:
Therefore, the amount that will be available in the four years is $79,997.
2.
Prepare
2.
Explanation of Solution
Date | Account Titles and Explanation |
Debit (Amount in $) |
Credit (Amount in $) |
Savings Account | 58,800 | ||
Cash | 58,800 | ||
(To record the cash deposited by Mr. A in savings account) |
(Table 1)
- Savings account is an asset and there is an increase in the value of an asset. Hence, debit the savings account by $58,800.
- Cash is an asset and there is a decrease in the value of an asset. Hence, credit the asset by $58,800.
3.
Compute the total interest for four years.
3.
Explanation of Solution
Compute the total interest for four years:
Therefore, the total interest for four years is $21,197.
4.
Provide the journal entry that Mr. A should make on (a) December 31 of the first year (b) December 31 of second year.
4.
Explanation of Solution
Journal:
Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.
Accounting rules for journal entries:
- To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
- To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.
Prepare journal entry to record that Mr. A should make on December 31 of first year:
Date | Account Titles and Explanation |
Debit (Amount in $) |
Credit (Amount in $) |
Savings Account | 4,704 | ||
Interest revenue (1) | 4,704 | ||
(To record the interest revenue earned during December 31 in first year for deposit made) |
(Table 2)
- Savings account is an asset and there is an increase in the value of an asset. Hence, debit the savings account by $4,704.
- Interest revenue is a component of
stockholder’s equity and there is an increase in the value of revenue and equity. Hence, credit the interest revenue by $4,704.
Working Note:
Prepare journal entry to record that Mr. A should make on December 31 of second year:
Date | Account Titles and Explanation |
Debit (Amount in $) |
Credit (Amount in $) |
Savings Account | 5,080 | ||
Interest revenue (2) | 5,080 | ||
(To record the interest revenue earned during December 31in second year for deposit made) |
(Table 3)
- Savings account is an asset and there is an increase in the value of an asset. Hence, debit the savings account by $5,080.
- Interest revenue is a component of stockholder’s equity and there is an increase in the value of revenue and equity. Hence, credit the interest revenue by $5,080.
Working Note:
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Chapter 9 Solutions
Financial Accounting
- Samuel Ames owes 20,000 to a friend. He wants to know how much he would have to pay if he paid the debt in 3 annual installments at the end of each year, which would include interest at 14%. Draw a time line for the problem. Indicate what table to use. Look up the table value and place it in a brief formula. Solve.arrow_forwardCalculating interest earned and future value of savings account. If you put 6,000 in a savings account that pays interest at the rate of 3 percent, compounded annually, how much will you have in five years? (Hint: Use the future value formula.) How much interest will you earn during the five years? If you put 6,000 each year into a savings account that pays interest at the rate of 4 percent a year, how much would you have after five years?arrow_forwardUse the tables in Appendix B to answer the following questions. A. If you would like to accumulate $4,200 over the next 6 years when the interest rate is 8%, how much do you need to deposit in the account? B. If you place $8,700 in a savings account, how much will you have at the end of 12 years with an interest rate of 8%? C. You invest $2,000 per year, at the end of the year, for 20 years at 10% interest. How much will you have at the end of 20 years? D. You win the lottery and can either receive $500,000 as a lump sum or $60,000 per year for 20 years. Assuming you can earn 3% interest, which do you recommend and why?arrow_forward
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