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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Future Values and Long-Term Investments

Portman Corporation engaged in the following transactions during 2020:

a. On January 1, 2020, Portman deposited $12,000 in a certificate of deposit paying 6% interest compounded semiannually (3% per 6-month period). The certificate will mature on December 31, 2023

b. On January 1, 2020, Portman established an account with Lee County Bank. Portman will make quarterly payments of $2,500 to Lee beginning on March 31, 2020, and ending on December 31, 2021. Lee guarantees an interest rate of 8% compounded quarterly (2% per 3-month period).

Required:

1. Prepare the cash flow diagram for each of these two investments.

2. Calculate the amount to which each of these investments will accumulate at maturity. (Note: Round answers to two decimal places.)

To determine

(a)

Introduction:

The future value of amount includes the compound interest and the initial cash flow. It considers the time value of money.

To prepare:

Cash Flow for investments.

Explanation

a. Investment Date = January 1, 2020

Cashflow = $12,000

Interest = 6% p.a.

Maturity Date = December 31, 2023

No. of years = 4

Compounded semi-annually,

No. of periods = 8

Semi-annual Interest Rate = 3%

b...

To determine

(b)

Introduction:

Investment in debt security (available for sale securities and trading securities) as well as equity securities is recorded using Fair Value Method.

To calculate:

The value of investment at maturity.

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