Acc201 Chapter 10 important information part 5

# Acc201 Chapter 10 important information part 5 - the...

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Some pension plans create obligations during employees' service periods that must be paid during their retirement periods. The amounts contributed during the employment period are determined using present value computations of the estimate of the future amount to be paid during retirement. Corporations are separate legal entities and are required to pay income taxes. In most cases, a large corporation's tax obligation is determined by multiplying taxable income by the corporate tax rate. Future value problems are similar to present value problems in the sense that they are both based on the time value of money. The future value is the sum to which an amount will increase as the result of compound interest. Example: If we invest \$1,000 today earning 10% interest, compounded annually, how much will it be worth in three years? The future value is \$1,331. Using the future value of a single amount table, we find the factor for 10% and 3 periods, which is 1.331. We then multiply this factor times
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Unformatted text preview: the present value of \$1,000 to arrive at a future value of \$1,331. Recall that an annuity is a series of consecutive payments characterized by an equal dollar amount each interest period, interest periods of equal length, and an equal interest rate each period. If you are saving money for some purpose, such as a new car or a trip to Europe, you might decide to deposit a fixed amount of money in a savings account each month. The future value of an annuity computation will tell you how much money will be in your savings account at some point in the future. Example: If we invest \$1,000 each year at an interest rate of 10%, compounded annually, how much will we have at the end of three years? The future value is \$3,310. Using the future value of an annuity table, we find the factor for 10% and 3 periods, which is 3.3100. We then multiply this factor times the annuity payments of \$1,000 to arrive at a future value of \$3,310....
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## This note was uploaded on 03/19/2008 for the course ACCT 201 taught by Professor Anothony during the Fall '07 term at Michigan State University.

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