Question

Tarawa Limited issued $1,110,000 of 10-year, 5% bonds on January 1, 2018, when the market interest rate was 6%. Tarawa received $1,027,435 when the bonds were issued. Interest is payable semi-annually on July 1 and January 1. Tarawa has a December 31 year end.

1)Record the issue of the bonds on January 1. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1	enter an account title to record the issue of the bonds on January 1	enter a debit amount	enter a credit amount
	enter an account title to record the issue of the bonds on January 1	enter a debit amount	enter a credit amount

2) Record the payment of interest on July 1. (Round answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
July 1	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount
	enter an account title	enter a debit amount	enter a credit amount

3)Record the accrual of interest on December 31. (Round answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
Dec. 31	enter an account title to record the accrual of interest on December 31	enter a debit amount	enter a credit amount
	enter an account title to record the accrual of interest on December 31	enter a debit amount	enter a credit amount
	enter an account title to record the accrual of interest on December 31	enter a debit amount	enter a credit amount

4)

Prove the amount of cash received when the bonds were sold by determining the bonds’ present value (issue price) on January 1, 2018. Prove the carrying amount of the bonds, one year later, by determining the present value of the bonds at that time. (Round answers to 0 decimal places, e.g. 5,275.)

Bonds’ present value (issue price) on January 1, 2018		$enter a dollar amount rounded to 0 decimal places
Present value of the bonds		$enter a dollar amount rounded to 0 decimal places

Answer 1

Face Value of Bonds = $1,110,000
Issue Value of Bonds = $1,027,435

Discount on Bonds = Face Value of Bonds - Issue Value of Bonds
Discount on Bonds = $1,110,000 - $1,027,435
Discount on Bonds = $82,565

Annual Coupon Rate = 5.00%
Semiannual Coupon Rate = 2.50%
Semiannual Coupon = 2.50% * $1,110,000
Semiannual Coupon = $27,750

Annual Interest Rate = 6.00%
Semiannual Interest Rate = 3.00%

Answer 4.

Calculation of issue price:

Time to Maturity = 10 years
Semiannual Period = 20

Issue Price = $27,750 * PVA of $1 (3.00%, 20) + $1,110,000 * PV of $1 (3.00%, 20)
Issue Price = $27,750 * 14.87747 + $1,110,000 * 0.55368
Issue Price = $1,027,435

Calculation of carrying amount:

Time to Maturity = 9 years
Semiannual Period = 18

Carrying Amount of Bonds = $27,750 * PVA of $1 (3.00%, 18) + $1,110,000 * PV of $1 (3.00%, 18)
Carrying Amount of Bonds = $27,750 * 13.75351 + $1,110,000 * 0.58739
Carrying Amount of Bonds = $1,033,673