Fran will include the first quarterly payment after 6.25 years in her gross income as only the payments received after the recoupment of the initial investment are included.
To find out how much of the first quarterly payment Fran will include in her gross income, we need to first calculate the annual payment amount. Since she is receiving $12,000 quarterly payments for the next 10 years, the annual payment amount would be $12,000 multiplied by 4 (number of quarters in a year) which equals $48,000.
Next, we divide the cost of the annuity ($300,000) by the annual payment amount ($48,000) to find out how many years it will take for Fran to recoup her investment. In this case, it would be $300,000 divided by $48,000 which equals 6.25 years.
Since Fran is expecting to receive payments for 10 years, and she recoups her investment in 6.25 years, only the payments received after the recoupment of the initial investment will be included in her gross income. Therefore, Fran will include the first quarterly payment after 6.25 years in her gross income.
Complete Question
Fran purchased an annuity that provide $12,000 quarterly payments for the next 10 years. The annuity was purchased at a cost of $300,000. How much of the first quarterly payment will Fran include in her gross income ?