Question

Problem 12-11A The following bond transactions occurred during 2018 for the University of Higher Learning (UHL)...

Problem 12-11A

The following bond transactions occurred during 2018 for the University of Higher Learning (UHL) and Covington Ltd.:
Feb. 1 UHL issued $9,000,000 of five-year, 4% bonds at 95 (this means 95% of maturity value) at a price to yield a market interest rate of 5.1%. The bonds pay interest semi-annually on August 1 and February 1.
1 Covington Ltd. purchased $3,100,000 of UHL’s bonds at 95 as a long-term investment that was to be held to maturity.
Aug. 1 The semi-annual interest on the bonds was paid.
Prepare all required journal entries for Covington Ltd., the investor, to record the above transactions. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)

Date

Account Titles and Explanation

Debit

Credit

Feb. 1

Aug. 1

SHOW LIST OF ACCOUNTS

LINK TO TEXT

How would the journal entries for Covington Ltd. change if the investment had been purchased for trading purposes? (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)

Date

Account Titles and Explanation

Debit

Credit

Feb. 1Aug. 1

Feb. 1Aug. 1

SHOW LIST OF ACCOUNTS

LINK TO TEXT

Prepare all required entries for UHL, the investee, to record the above transactions. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)

Date

Account Titles and Explanation

Debit

Credit

Feb. 1

Aug. 1

Homework Answers

Answer #1

Ans: Journal Entries for part A to C

Date Account title and explanation Debit($) Credit($)
A).
Feb 1 Investment in Securities Bonds(3,100,000*95%) 2,945,000
Cash 2,945,000
(to record investment)
Aug 1 Cash{3,100,000*4%*1/2) 62,000
Discount on investment of Bonds 13,097.50
Interest Revenue{3,100,000*95%*5.1%*1/2) 75,097.50
(to record semi annual interest)
B).
Feb 1 Investment in Securities Bonds 3,100,000
Discount on investment in bonds 155,000
Cash 2,945,000
( to record purchase of investment as trading)
Aug 1 Cash{3,100,000*4%*1/2) 62,000
Interest Revenue 62,000
( to record semi annual interest)
C).
Feb 1 Cash 9,000,000
Bonds Payable 9,000,000
( to record bonds issued)
Aug 1 Interest Expense(9,000,000*1/2*4%) 180,000
Cash 180,000
( to record interest)
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