Tilman Company is required by a bond indenture to make equal annual payments to a bond sinking fund at the end of each of the next 20 years. The sinking fund will earn 8 percent interest and must accumulate to a total of $500,000 at the end of the 20-year period.

Instructions

a. Calculate the amount of the annual payments.

b. Calculate the total amount of interest that will be earned by the fund over the 20-year period.

c. Make the general journal entry to record redemption of the bond issue at the end of the 20-year period, assuming that the sinking fund is recorded on Tilman’s accounting records at $500,000 and bonds payable are recorded at the same amount.

d. What would be the effect of an increase in the rate of return on the required annual payment? Explain.