Question

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. 2021 July 1 Purchased $16 million of Bracecourt Corporation 10% debentures, due in 20 years (June 30, 2041), 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, 2031, 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. 2022 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. 2023 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.) Complete this question by entering your answers in the tabs below. Required 1 Required 2 Prepare the appropriate journal entries for these long-term bond investments. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Enter your answers in whole dollars.)

Answer 1

Livermore Laboratories Requirement 1 Journal Enteries Date Particulars 1.7.2021 Bond investment (face amount) a/c Dr. To Discount on bond investment (difference) To Cash (price paid) Debit in $ Credit in $ 16000000 300000 15700000 1.10.2021 Bond investment (face amount) a/c Dr. Premium on bond investment a/c Dr. Interest receivable ($30,000,000 x 12% x 4/12) a/c Dr. To Cash ($31,160,000 +1,200,000) 30000000 1160000 1200000 32360000 1.12.2021 1800000 Cash (6% x $30,000,000) a/c Dr. To Premium on investment To Interest receivable (from October entry) To Interest revenue (to balance) 10 years - (June-September) = 116 months $1,160,000 = 116 months = $10,000 / month $10,000 x 2 months = $20,000 20000 1200000 580000 800000 7500 Bracecourt 31.12.2021 Interest receivable ($16,000,000 x 10% x 6/12) a/c Dr. Discount on bond investment a/c Dr. To Interest revenue (to balance) 20 years = 240 months; $300,000 = 240 months = $1,250 / month $1,250 x 6 months = $7,500 807500 300000 Framm Interest receivable ($30,000,000 x 12% x 1/12) a/c Dr. To Premium on investment ($10,000 x 1 month) To Interest revenue (to balance) 10000 290000 1.1.2022 800000 Cash (10% x $16,000,000 X 6/12) a/c Dr. To Interest receivable (from adjusting entry) 800000 1.6.2022 1800000 Cash (12% x $30,000,000 x 6/12) a/c Dr. To Premium on investment ($10,000 x 5 months) To Interest receivable (from adjusting entry) To Interest revenue (to balance) 50000 300000 1450000 1.7.2022 Cash (10% x $16,000,000 X 6/12) a/c Dr. Discount on bond investment ($1,250 x 6 months) a/c Dr. To Interest revenue (to balance) 800000 7500 807500

Date 1.9.2022 Particulars Interest receivable (12% x $15,000,000 x 3/12) a/c Dr. To Premium on investment ($10,000 x 3 months x 15/30) To Interest revenue (difference) Debit in $ Credit in $ 450000 15000 435000 Cash ([101% x $15,000,000] + $450,000) a/c Dr. 15600000 Loss on sale of investment a/c Dr. 375000 To Bond investment (face amount) To Premium on bond investment To Interest receivable (12% x $15,000,000 x 3/12) ([$1,160,000 - 20,000 - 10,000-50,000] x 15/30) - $15,000 = $525,000, or ($1,160,000 x 105/116 x 15/30] = $525,000 ($15,000,000 + 525,000] -(101% x $15,000,000]) = $375,000 15000000 525000 450000 1.12.2022 Dr. 900000 Cash (12% x $15,000,000 x 6/12) a/c To Premium on investment To Interest revenue (to balance) ($10,000 x 6 months x 15/30) 30000 870000 Bracecourt 31.12.2022 Interest receivable (10% x $16,000,000 x 6/12) a/c Dr. Discount on bond investment ($1,250 x 6 months) a/c Dr. To Interest revenue (to balance) 800000 7500 807500 150000 Framm Interest receivable ($15,000,000 x 12% 1/12) a/c Dr. To Premium on investment ($10,000 x 1 month x 15/30) To Interest revenue (to balance) 5000 145000 1.1.2023 800000 Cash (10% x $16,000,000 x 6/12) a/c Dr. To Interest receivable (from adjusting entry) 800000 28.2.2023 300000 Interest receivable (12% x $15,000,000 x 2/12) a/c Dr. To Premium on investment ($10,000 x 2 months x 15/30) To Interest revenue (difference) 10000 290000 Dr. Dr. 15750000 195000 Cash ([102% x $15,000,000] + $150,000 + 300,000) a/c Loss on sale of investment a/c To Bond investment (face amount) To Premium on bond investment To Interest receivable (12% x $15,000,000 x 3/12) 15000000 495000 450000 $1,160,000 - 20,000 - 10,000 - 50,000 - 15,000-525,000-30,000 -5,000 - 10,000 = $495,000, or ($1,160,000 x 99/116 x 15/30] = $495,000 ($15,000,000 + 495,000] -(102% x $15,000,000]) = $195,000 31.12.2023 Interest receivable (10% x $16,000,000 x 6/12) a/c Dr. Discount on bond investment ($1,250 x 6 months) a/c Dr. To Interest revenue (to balance) 800000 7500 807500

Requirement 2 2021 Interest revenue-Dec. 1 Interest revenue-Dec. 31 Interest revenue-Dec. 31 Increase in pretax earnings 580000 807500 290000 1677500 2022 Interest revenue- June 1 Interest revenue-July 1 Interest revenue-Sept. 1 Loss on sale of investment Interest revenue-Dec. 1 Interest revenue-Dec. 31 Interest revenue-Dec. 31 Increase in pretax earnings 1450000 807500 435000 -375000 870000 807500 145000 4140000 2023 Interest revenue-Feb. 28 Loss on sale of investment Interest revenue-Dec. 31 Increase in pretax earnings 290000 -195000 807500 902500