Accounting Theory

Benefits

and

Types

of

Annuities
The major reason
why we take an
investment is to
be able to gain
future benefits. A
dollar

today

is

worth two in the

future. This paper seeks to assess the benefits of various types of annuities as well
as a comparison between the straight line method and the effective interest rate
method of amortization. Finally, a critique statement on the FASBs position for
using the effective organization interest rate method for amortizing a discount will
be provided (Rocha, Vittas, & Rudolph, 2010).
Fixed annuities
This annuity pays a guaranteed rate of interest annually with two options. The
deferred option accumulates regular rates of interest while the lump- sum model
pays a fixed amount. Guaranteed payment is the major advantage of this plan thus
providing a cushion against harsh periods(Rocha, Vittas, & Rudolph, 2010).
Variable annuity
Is a tax deferring scheme that allows one to choose from a selection of investment?
The payment received will be influenced by the performance of the portfolio

chosen. This scheme has the merit of pumping the saving through the growth
potential and hires interest rate accorded to this scheme, makes it more viable
compared to the fixed annuity(Rocha, Vittas, & Rudolph, 2010).
Equity indented annuity
This plan combines both the fixed elements and the variable elements. This plan,
therefore, guarantees returns of a fixed amount and the growth potential
associated with variable schemes.This plan cushions the investors by gaining more
income during the booms and earning a fixed amount during the harsh economic
periods.
Immediate annuity
This plan employs similar principles with life insurance policy on that in this case,
the investor pays an insurer a lump- sum cash and expect regular incomes until
the death of the policyholder. There is an option of receiving payments for a
specific period or payment directed toward the proposed beneficiaries(Rocha,
Vittas, & Rudolph, 2010).

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Longevity annuity
This plan protects investors against outliving their money value. It dictates that
investors will receive income upon attaining a particular age. The money earns
interest until one receives the first reimbursement(Rich, 2012).
From the above analysis, equity- an indented annuity is the plan that gives the
investors the ideal cushion as it provides the investors the perfect mix.

Given the formula to calculate the total annuity is

Total annuity = accounting principle *[
Given that r= 10%
n= 30years
Principle of $2000 annually
Using the scientific calculate, total annuity will be $70121.20
The Straight Line and the Effective Interest Rate Methods of Amortization
Annual Straight Line Method
The accountant transfers an equal amount from
the bond discount or premium account over to
the interest expense account for each payment
period. Discounted bonds require accountant to
add to interest expense balance each month,
accounting for the additional expenses of selling
a bond at a discount and repay it at face value.
Bond at premium requires the accountant to
subtract from interest expense account as they
reduce the credit balance in the premium
account. To determine the amount to amortize,
the total amount of bond premium or discount is divided by the number of
payment periods and the same amount is used for each period(Rocha, Vittas, &
Rudolph, 2010).

Effective Interest Rate

This method does not provide an equal amount of amortization per period but
calculates the amount to transfer for each period. The firm will, however, make
equal interest payment for each period but record different amount in the interest
expense category. To determine the amount to assign to interest expense each
period, multiply the effective interest rate by the current book value of the
bond(Rich, 2012).

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Accounting Solutions

Effective Interest Method is more representative and more accurate than the
annual straight method. Reducing the amount of bond discount or premium by a
smaller amount each period provides a more vivid picture of the bonds value
throughout different point of the repayment.
References
Holzmann, R., Palmer, E., Robalino, D. A., & World Bank. (2012). NDC pension
schemes in a changing pension world: Progress, lessons, and implementation.
Washington D.C: World Bank.
Rich, J. S. (2012). Cornerstones of financial & managerial accounting. Mason,
OH: South-Western/Cengage Learning
Rocha, R. R., Vittas, D., & Rudolph, H. P. (2010).Annuities and other retirement
products: Designing the payout phase. Washington, D.C: World Bank.