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Investment Journal Entries and Calculations

This document contains solutions to 3 exercises on compound interest and investment calculations. The first exercise provides the journal entry to record an investment in another company's common stock. The second calculates the present value needed to invest now to achieve a future value goal at a given interest rate compounded annually. The third calculates the future value of an investment over 10 years at an interest rate compounded semi-annually.

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Montserrat Gonzalez
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6 views2 pages

Investment Journal Entries and Calculations

This document contains solutions to 3 exercises on compound interest and investment calculations. The first exercise provides the journal entry to record an investment in another company's common stock. The second calculates the present value needed to invest now to achieve a future value goal at a given interest rate compounded annually. The third calculates the future value of an investment over 10 years at an interest rate compounded semi-annually.

Uploaded by

Montserrat Gonzalez
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Chapter 8 Solutions

Exercise 1

Pepsi Co. bought 25% of the common stock of Lays Inc for $80,000. What is the journal entry?

If Lays Inc reported net income of $50,000 and paid dividends of $30,000, what is the carrying
value of Pepsi Co.’s investment in Lays Inc?

Solutions to Exercise 1

Long Term Investment $ 80,000


Cash $ 80,000

The carrying value is:

80,000 + 25% * (50,000-30,000) = 80,000 + 5,000 = $85,000

Exercise 2

Our company wants to have $20,000 in 10 years. If the interest rate is 6%, compounded
annually, what amount should we invest now to get $20,000 in 10 years?

Solution to Exercise 2

Present Value = Future Value / (1 + Interest Rate)n


Present Value = 20,000 / (1 + 0.06)10

Present Value = $11,167 (rounded)

Exercise 3

Our company wants to invest $20,000 now for 10 years. If the interest rate is 6%, compounded
semi-annually, what amount will our company receive in 10 years?

Solution to Exercise 3

Since the interest is paid semi-annually, we need to multiply the periods with 2, and divide the
interest rate by 2.
10 years * 2 = 20 periods

6% / 2 = 3% interest rate semi-annually

Present Value = Future Value / (1 + Interest Rate)n


20,000 = Future Value / (1 + 0.03)10

Future Value = 20,000 * (1+0.03)20

Future Value = $36,122 (rounded)

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