Question
In: Accounting
. The Rangaletta Company issues a five-year, zero-coupon bond on January 1, Year One. The bond...
. The Rangaletta Company issues a five-year, zero-coupon bond on January 1, Year One. The bond has a face value of $200,000 and is issued to yield an effective interest rate of 9 percent. Rangaletta receives $129,986. On January 1, Year Three, Rangaletta pays off the bond early by making a payment of $155,000 to the bondholder. Make all journal entries from January 1, Year One, through January 1, Year Three assuming the effective rate method is applied. 6. Do problem 5 again but assume that the straight-line method is used.
Solutions
Expert Solution
pv of zero coupon bond = 200000/(1.09)5 = 129986
journal entry
| date | particular | debit | credit |
| year one , jan1 | cash | 129986 | |
| zero coupon bond payable | 129986 | ||
| year one, dec 31 | interest(129986*9) | 11699 | |
| zero coupon bond payable | 11699 | ||
| total value of zcb = 129986+11699=141685 | |||
| year two, dec 31 | interest(141685*9) | 12752 | |
| zero coupon bond payable | 12752 | ||
| total value of zcb = 141685+12752= 154437 | |||
| year three, jan 1 | zero coupon bond payable | 154437 | |
| premium on redemption of ZCB | 563 | ||
| cash | 155000 |
bond were redeemed before the maturity that is in the beginning of the year 3
its liability@ 9%interest was = 129986*1.09*1.09=155437
but we paid = 155000
soextra paid = 155000-155437 = 463
pv of zero coupon bond = 200000/(1.09)5 = 129986
journal entry:- straight-line method
under straight linemethod , the difference between the face value and issue price, which is the interest earned over a period of 5 year,is to be recorded equally every year
200000-129986 = 70014 total interest yield to investor
per year interest expense = 70014/5 = 14003 approx
| date | particular | debit | credit |
| year one , jan1 | cash | 129986 | |
| zero coupon bond payable | 129986 | ||
| year one, dec 31 | interest | 14003 | |
| zero coupon bond payable | 14003 | ||
| total value of zcb = 129986+14003=143989 | |||
| year two, dec 31 | interest | 14003 | |
| zero coupon bond payable | 14003 | ||
| total value of zcb = 143989+14003=157992 | |||
| year three, jan 1 | zero coupon bond payable | 157992 | |
| cash | 155000 | ||
| gain on redemtion of ZCB | 2992 |
bond were redeemed before the maturity that is in the beginning of the year 3
its liabilityas per SLM was = 129986+14003+14003=157992
but we paid = 155000
so extra gain= 2992
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