The following bond transactions occurred during 2015 for the University of Higher Learning (UHL) and Otutye Ltd.:
Feb. 1 UHL issued $10 million of five-year, 8% bonds at 98 (this means 98% of maturity value). The bonds pay interest semi-annually on August 1 and February 1 and were sold at a discount because the market interest rate was 8.5%.
1 Otutye Ltd. purchased $3 million of UHL's bonds at 98 as a long-term investment that was to be held to maturity.
Aug. 1 The semi-annual interest on the bonds was paid.
1 After paying the semi-annual interest on the bonds on this date, UHL decided to repurchase $3 million of its bonds and retire them. UHL repurchased all $3 million of the bonds from Otutye at 99.
Instructions
(a) Prepare all required journal entries for Otutye Ltd., the investor, to record the above transactions.
(b) How would the journal entries for Otutye Ltd. change if the investment had been purchased for trading purposes?
(c) Prepare all required entries for UHL, the investee, to record the above transactions.
(d) Comment on the differences in recording that you observe between the investor and the investee?