Zulu Corporation hires a new chief executive officer and promises to pay her a signing bonus of $2 million per year for 10 years, starting five years after she joins the company. The liability for this bonus when the CEO is hired:
A) Is the present value of a deferred annuity.
B) Is the present value of an annuity due.
C) Is $20 million.
D) Is zero because no cash is owed for five years.

Question

Quizplus · Accepted Answer

The liability for this signing bonus is a deferred annuity because it is not payable immediately, but rather will be paid out over a period of 10 years starting five years from the CEO's start date. Therefore, the liability must be calculated as the present value of the future payments.

Zulu Corporation Hires a New Chief Executive Officer and Promises