Question

Exercise 10-14 Tarawa Limited issued $1,250,000 of 10-year, 5% bonds on January 1, 2018, when the market interest rate was 6%. Tarawa received $1,157,021 when the bonds were issued. Interest is payable semi-annually on July 1 and January 1. Tarawa has a December 31 year end. Record the issue of the bonds on January 1. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Debit Credit Date Account Titles and Explanation Jan. 1 SHOW LIST OF ACCOUNTS LINK TO TEXT 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 SHOW LIST OF ACCOUNTS LINK TO TEXT

Answer 1

On Issue of Bond: Date Credit ($) Account Title and Explanation Bank Discount on issue of bond 5% Bond (Being bond issued at discount) Debit ($) 1,157,021.00 92,979.00 1-Jan 1,250,000.00 On payment of interest on July 1: Date Credit ($) Debit ($) 31,250.00 1-Jul Account Title and Explanation Bond Interest expense Bank (Being interest paid on bond) 31,250.00 On accrual of interest on Juanuary 1: Date Credit ($) Debit ($) 31,250.00 31-Dec Account Title and Explanation Bond Interest expense Bond Interest Payable (Being interest accrued on bond) 31,250.00

To prove that present value on January 1, 2018 is equal to issue price Present value of Principal price = Face Value * PVFI 3%, 20) = $1,250,000 * 0.5537 = $ 692,125 Present value of Interest = Interest expense * PVAF( 3%, 20) = ($1,250,000 * 5%* (6/12)) * 14.877 = $31,250 * 14.877 = $464,906

Present value of interest on January 1, 2018 - Present value of Principal + Present value of Interest =$692,125 + $464,906 = $1157031 Thus, the present value of bond is almost equalto its issue price. Now, Calculate carrying value of bond after 1 year. Carrying value of bond on January 1, 2019 = Present value on January 1, 2018 * (1+.03)2 = $ 1157031 * 1.061 =$ 1,227,610 Hence, carrying value of bond after 1 year is = $1,227,610