Question
In: Accounting
The following transactions relate to bond investments of Livermore Laboratories. The company’s fiscal year ends on...
The following transactions relate to bond investments of
Livermore Laboratories. The company’s fiscal year ends on December
31. Livermore uses the straight-line method to determine
interest.
2018
| July | 1 | Purchased $16 million of Bracecourt Corporation 10% debentures, due in 20 years (June 30, 2038), for $15.7 million. Interest is payable on January 1 and July 1 of each year. | ||
| Oct. | 1 | Purchased $30 million of 12% Framm Pharmaceuticals debentures, due May 31, 2028, for $31,160,000 plus accrued interest. Interest is payable on June 1 and December 1 of each year. | ||
| Dec. | 1 | Received interest on the Framm bonds. | ||
| Dec. | 31 | Accrued interest. |
2019
| Jan. | 1 | Received interest on the Bracecourt bonds. | ||
| June | 1 | Received interest on the Framm bonds. | ||
| July | 1 | Received interest on the Bracecourt bonds. | ||
| Sept. | 1 | Sold $15 million of the Framm bonds at 101 plus accrued interest. | ||
| Dec. | 1 | Received interest on the remaining Framm bonds. | ||
| Dec. | 31 | Accrued interest. |
2020
| Jan. | 1 | Received interest on the Bracecourt bonds. | ||
| Feb. | 28 | Sold the remainder of the Framm bonds at 102 plus accrued interest. | ||
| Dec. | 31 | Accrued interest. |
Required:
1. Prepare the appropriate journal entries for
these long-term bond investments.
2. By how much will Livermore Labs’ earnings
increase in each of the three years as a result of these
investments? (Ignore income taxes.)
Solutions
Expert Solution
| Date | Pariculars | Debit | Credit |
| July 1, 2018 | Investment - bracecourt Corp. 10% debentures | 15700000 | |
| Cash | 15700000 | ||
| Oct 1, 2018 | Investment - Framm Pharmaceuticals 12% debentures | 31160000 | |
| Interest Receivable (30000000*12%*4/12) | 1200000 | ||
| Cash | 32360000 | ||
| Dec 1, 2018 | Cash (30000000*12%*6/12) - (Interest on Framm Pharma) | 1800000 | |
| Interest Receivable | 1200000 | ||
| Interest Income | 600000 | ||
| Dec 31, 2018 | Interest receivables (16000000*10%*6/12) | 800000 | |
| Interest Income (interest on Bracecourt Corp) | 800000 | ||
| Jan 1, 2019 | Cash (interest on Bracecourt Corp) | 800000 | |
| Interest receivables (16000000*10%*6/12) | 800000 | ||
| June 1,2019 | Cash (30000000*12%*6/12) - (Interest on Framm Pharma) | 1800000 | |
| Interest Income | 1800000 | ||
| July 1, 2019 | Cash (interest on Bracecourt Corp) | 800000 | |
| Interest Income | 800000 | ||
| Sept 1, 2019 | Cash | 15600000 | |
| Loss on sale of investment | 430000 | ||
| Interest income | 450000 | ||
| Investment - Framm Pharmaceuticals 12% debentures | 15580000 | ||
| Sale proceed=15000000*101%=15150000 | |||
| Purchase price=31160000/2=15580000 | |||
| Loss on sale of investment=15580000-15150000=430000 | |||
| Accrued Interest=15000000*12%*3/12=450000 | |||
| Cash Received=Sale proceed + Accrued Interest | |||
| Dec 1 2019 | Cash (15000000*12%*6/12) - (Interest on Framm Pharma) | 900000 | |
| Interest Income | 900000 | ||
| Dec 31, 2019 | Interest receivables (16000000*10%*6/12) | 800000 | |
| Interest Income (interest on Bracecourt Corp) | 800000 | ||
| Jan 1, 2020 | Cash (interest on Bracecourt Corp) | 800000 | |
| Interest receivables (16000000*10%*6/12) | 800000 | ||
| Feb 28, 2020 | Cash | 15750000 | |
| Loss on sale of investment | 280000 | ||
| Interest income | 450000 | ||
| Investment - Framm Pharmaceuticals 12% debentures | 15580000 | ||
| Sale proceed=15000000*102%=15300000 | |||
| Purchase price=31160000/2=15580000 | |||
| Loss on sale of investment=15580000-15300000=280000 | |||
| Accrued Interest=15000000*12%*3/12=450000 | |||
| Cash Received=Sale proceed + Accrued Interest=15750000 | |||
| July 1, 2020 | Cash (interest on Bracecourt Corp) | 800000 | |
| Interest Income | 800000 | ||
| Dec 31, 2020 | Interest receivables (16000000*10%*6/12) | 800000 | |
| Interest Income (interest on Bracecourt Corp) | 800000 |
| Interest Income | Profit or loss on sale of investment | Total Income | |
| 2018 | 1400000 | 1400000 | |
| 2019 | 4750000 | -430000 | 4320000 |
| 2020 | 2050000 | -280000 | 1770000 |
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