You are the CEO of Dry Bottoms Diaper Service, which provides cloth diaper deliv

Question

You are the CEO of Dry Bottoms Diaper Service, which provides cloth diaper delivery, pick up, and laundering. Your customer base consists of a small number of upper middle class and wealthy families who can afford the luxury of your service. However, as part of your 2016 strategic plan, you want to expand your customer base to include averaging middle class working families as well. After months of collaboration, your executive team proposes that on December 1st, 2015, you announce your 'New Years Baby" sweepstakes. The sweepstakes will provide three months of free diaper service AND a full college scholarship to the first baby born at Community General Hospital on January 1st, 2016. Based upon average tuition costs at public, non-profit universities within your state, you determine that in order to fund the full scholarship, you will need to have accumulated $112,000 at the end of 17 years. To do this, your CFO plans on depositing equal monthly amounts into a restricted trust account that pays 6.25% compounded interest annually.

1. How would YOU elect to record the new $112,000 liability on your corporate financial reports (Balance Sheet, Income Statement, Statement of Cash Flows)?

2. What is the monthly amount that will be deposited each month?

Explanation / Answer

per month contribution would be recorded as liability,

Statment of cash flows the cashoutflow per month would be recorded in financing activity

Deposit in each month would be:

FV = cashflow * (1-(1+i)^-n)/i

$112,000 = cashflow * (1-(1+6.25%)^-17)/6.25%

112,000 = cashflow * 10.29

cashflow = 10,882.85 per annum

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