(a) Record the issue of the bonds on January 1 — Tarawa Limited issued million 10-year 2018 when market interest rate was received

Tarawa Limited issued $1 million of 10-year, 5% bonds on January 1, 2018, when the market interest rate was 6%. Tarawa received $925,617 when the bonds were issued. Interest is payable semi-annually on July 1 and January 1. Tarawa has a December 31 year end.

Instructions

(a) Record the issue of the bonds on January 1.

(b) Record the payment of interest on July 1.

(c) Record the accrual of interest on December 31.

(d) 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.

SOLUTION

(a) Jan. 1 Cash 925,617

Bonds Payable 925,617

(b) July 1 Interest Expense ($925,617× 6% × 6/12) 27,769

Bonds Payable ($27,769 – $25,000) 2,769 

Cash ($1,000,000 × 5% × 6/12) 25,000

(c) Dec. 31 Interest Expense [($925,617 + $2,769) × 6% × 6/12] 27,852

Bonds Payable ($27,852 – $25,000) 2,852

Interest Payable ($1,000,000 × 5% × 6/12) 25,000

(d) Key inputs: Future value (FV) = $1,000,000

Market interest rate (i) = 3% (6% ×6/12)