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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