In: Accounting
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.)
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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