On each December 31, you plan to transfer $2,000 from your checking account into a savings account.The savings account will earn 9 percent annual interest, which will be added to the savings account balance at each year-end. The first deposit will be made December 31, 2010
Requirement 1:
Give the required journal entry on December 31, 2010.
Requirement 2:
What will be the balance in the savings account at the end of the 10th year (i.e., 10 deposits)?
Requirement 3:
What is the total amount of interest earned on the 10 deposits? (Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)
Total amount of interest $
Requirement 4:
How much interest revenue did the fund earn in 2011? 2012? (Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)
Interest revenue
2011 $
2012 $
Requirement 5:
Give all required journal entries at the end of 2011 and 2012. (Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)
Requirement 1:
To record the initial deposit of $2,000 from the checking account into the savings account on December 31, 2010, the journal entry would be as follows:
Debit: Savings Account $2,000
Credit: Checking Account $2,000
This reflects a transfer of funds from the checking account to the savings account.
Requirement 2:
To calculate the balance in the savings account at the end of the 10th year, we need to consider the annual deposits and the interest earned. Since each deposit is made at the end of the year, the interest is compounded annually.
The annual interest rate is 9 percent, so at the end of the first year, the $2,000 deposit will earn interest of $2,000 x 0.09 = $180. Therefore, the balance in the savings account at the end of the first year would be $2,180.
For subsequent years, the balances can be calculated using the formula:
Balance at the end of the year = (Previous year's balance + $2,000) x (1 + 0.09)
= (Previous year's balance + $2,000) x 1.09
Using this formula, we can calculate the balance at the end of the 10th year. Starting with the balance at the end of the first year ($2,180), we can apply the formula for each subsequent year, up to the 10th year.
Requirement 3:
To calculate the total amount of interest earned on the 10 deposits, we need to sum up the interest earned each year. The interest earned on each deposit can be calculated using the formula:
Interest earned = Deposit x 0.09
Therefore, the total amount of interest earned on the 10 deposits would be:
Interest earned on each deposit = $2,000 x 0.09
Total interest earned = Interest earned on each deposit x 10
Requirement 4:
To calculate the interest revenue earned in 2011 and 2012, we need to determine the interest earned on the respective deposits.
In 2011, the deposit would be made on December 31, 2011. Therefore, there would be no interest revenue earned in 2011 since the deposit was made at the end of the year.
In 2012, the deposit would be made on December 31, 2012. To calculate the interest revenue earned in 2012, we can use the formula:
Interest revenue = Deposit x 0.09
Requirement 5:
To record the year-end adjustments for the savings account at the end of 2011 and 2012, we need to record the interest revenue for that year and update the balance in the savings account accordingly.
The journal entries at the end of 2011 and 2012 would be as follows:
At the end of 2011:
Debit: Interest Receivable (an asset account) for the interest revenue earned
Credit: Interest Revenue for the interest earned
At the end of 2012:
Debit: Interest Receivable for the interest revenue earned
Credit: Interest Revenue for the interest earned
These entries reflect the recognition of the interest revenue earned and the adjustment of the balance in the savings account.