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.

2011
July 1 Purchased $16 million of Bracecourt Corporation 10% debentures, due in 20 years (June 30, 2031), 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, 2021, 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.
31 Accrued interest.

2012
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.
31 Accrued interest.

2013
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.)



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