On December 31 2013 Post Company decided to invest a
On December 31, 2013, Post Company decided to invest a sufficient amount of cash to pay the principal amount of a $ 160,000 debt due on December 31, 2016. The company will make four equal annual deposits on December 31 of the years 2013 through 2016. The fund will earn 7 percent compound annual interest, which will be added to the balance at each year- end. The fund trustee will pay the loan principal (to the creditor) upon receipt of the last fund deposit. The company’s fiscal year ends on December 31. The four annual deposits have a present value of $ 122,064 on December 31, 2013.
Required (show computations and round to the nearest dollar):
1. How much cash must be deposited each December 31?
2. What amount of interest will be earned on the four deposits until December 31, 2016?
3. How much interest revenue will the fund earn each year?
4. Prepare journal entries for the company to record the following transactions:
a. The first deposit on December 31, 2013.
b. The deposit at December 31, 2014, and interest revenue for 2014.
c. The payment of the debt on December 31, 2016.
5. Show how the effect of the fund will be reported on the income statement for 2014 and the statement of financial position at December 31, 2014.
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