The City of Tutland issued 10 million, 6 percent, 10-year bonds at 101 to finance the refurbishment of its water utility fund equipment. The bond issuance is recorded in the water utility enterprise fund as:

1) Other financing sources of 10.1 million.
2) Revenues of 10.1 million.
3) Bonds payable of 10.1 million.
4) Bonds payable of 10 million and premium on bonds payable of 100,000.

The City of Tutland's bond issuance and valuation should be recorded as 'Bonds payable of 10 million and premium on bonds payable of 100,000.' When contemplating the purchase of a bond with a rate lower than current market rates, one would pay less than the face value. Bondholders are entitled to interest payments and can legally enforce payment upon a company's default.

Explanation:

The City of Tutland adopted a financing strategy to upgrade its water utility equipment by issuing 10-year bonds at 6 percent interest and at a price of 101, which suggests they were sold at a premium. The correct recording of the bond issuance in the water utility enterprise fund would be option 4) Bonds payable of 10 million and premium on bonds payable of 100,000. This reflects the two separate components of the transaction: the face value of the bonds and the extra amount paid by the investors over the face value, recognized as a premium on bonds payable.

When looking at the investment scenario where a local water company issued a $10,000 ten-year bond with 6% interest, and you consider purchasing the bond one year before maturity when interest rates have risen to 9%, you would expect to pay less than the face value of $10,000 due to increased market interest rates which make the bond less attractive. The specific amount you would be willing to pay depends on the present value of the remaining cash flows discounted at the current market interest rate of 9%.

In a broader context, when a company issues bonds, it is essentially borrowing money from the investors who purchase these bonds. Bondholders are entitled to interest payments, and upon maturity, the repayment of the principal amount. If a company defaults on these payments, bondholders have legal recourse, although there is no assurance that they will recover the full amount lent.

Additionally, looking at Tanzania's situation, the gap between government spending and net taxes will result in a continuous issuance of bonds to finance this deficit. If the rate of interest and the budget remain constant over 10 years, the accumulated debt can be computed as a geometric progression taking into account the annual issuance of bonds and the interest accrued on them.

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