Chapter 9, Problem 23E

1.

To determine

Identify the amount that will be available in the four years.

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:

$\begin{array}{c}\begin{array}{l}\text{Future}\\ \text{value}\end{array}\}\text{ = Invested }\left(\text{present}\right)\text{value × }\left(\begin{array}{l}\text{Future value factorof \$1 at interest }\\ \text{rate for time periods}\end{array}\right)\\ =\$58,800\times 1.36049\\ =\$79,997\end{array}$

Therefore, the amount that will be available in the four years is $79,997.

2.

To determine

Prepare journal entry that Mr. A should make on January 30.

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.

To determine

Compute the total interest for four years.

Explanation of Solution

Compute the total interest for four years:

$\begin{array}{c}\begin{array}{l}\text{Total interest for }\\ \text{four years }\end{array}\}\text{= }\left(\begin{array}{l}\text{Amount available }\\ \text{in four years}\end{array}\right)-\left(\begin{array}{l}\text{Amount deposited in}\\ \text{ savings account}\end{array}\right)\\ =\$79,997-\$58,800\\ =\$21,197\end{array}$

Therefore, the total interest for four years is $21,197.

4.

To determine

Provide the journal entry that Mr. A should make on (a) December 31 of the first year (b) December 31 of second year.

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:

$\begin{array}{c}\text{Interest revenue= }\left(\begin{array}{l}\text{Amount deposited in }\\ \text{savings account}\end{array}\right)\times \text{Interest rate}\\ \text{=\$58,800}\times \frac{8}{100}\\ =\$4,704\end{array}$        (1)

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:

$\begin{array}{c}\begin{array}{l}\text{Interest revenue}\\ \text{ in second year}\end{array}\}\text{= }\left(\begin{array}{l}\text{Amount deposited in }\\ \text{savings account+Interest earned}\\ \text{ during first year}\end{array}\right)\times \text{Interest rate}\\ \text{=}\left(\text{\$58,800+\$4,704}\right)\times \frac{8}{100}\\ =\$63,504\times \frac{8}{100}\\ =\$5,080\end{array}$        (2)