Question

2. Zero Coupon Bond

B Company sold a $5,000,000, 8 year zero coupon (zero interest paid) bond on January 1,

2018 to yield an effective interest rate of 7% annual.

Calculate the sale price of the bond. Prepare an 8 year amortization schedule. Make any

required entry on December 31, 2021 and on Dec. 31, 2025.

Answer 1

Year	PV factor @ 7%
1	0.934579439
2	0.873438728
3	0.816297877
4	0.762895212
5	0.712986179
6	0.666342224
7	0.622749742
8	0.582009105
Sale price of the bond (Present value of Bond) (5000000*0.582009105)	$        2,910,046
Face value of Bond	$        5,000,000
Less: Present value of Bond	$        2,910,046
Discount on Bond payable	$        2,089,954

Fair value
Interest payment (Credit Cash) = Face value of bond * Coupon rate = Here No interest.
Interest Expense (Debit Interest Expense) = book value of Bond for previous period * Market or Discounting rate
Amortization of bond Discount (Credit Bond Discount) = Interest Expense - Interest payment
Debit Balance in Bond Discount = Debit Balance in Bond Discount for previous period - Amortization of bond Discount
Credit Balance in Bond Payable = Face value of bond
Book value of Bond = Credit Balance in Bond Payable - Debit Balance in Bond Discount
Bond Discount Amortization Table
Period	Date	Interest payment	Interest Expense	Amortization of bond Discount	Debit Balance in Bond Discount	Credit Balance in Bond Payable	Book value of Bond
0	Jan 1, 2018				$        2,089,954	$        5,000,000	$        2,910,046
1	Dec 31, 2018	$            -	$            203,703	$            203,703	$        1,886,251	$        5,000,000	$        3,113,749
2	Dec 31, 2019	$            -	$            217,962	$            217,962	$        1,668,289	$        5,000,000	$        3,331,711
3	Dec 31, 2020	$            -	$            233,220	$            233,220	$        1,435,069	$        5,000,000	$        3,564,931
4	Dec 31, 2021	$            -	$            249,545	$            249,545	$        1,185,524	$        5,000,000	$        3,814,476
5	Dec 31, 2022	$            -	$            267,013	$            267,013	$            918,511	$        5,000,000	$        4,081,489
6	Dec 31, 2023	$            -	$            285,704	$            285,704	$            632,806	$        5,000,000	$        4,367,194
7	Dec 31, 2024	$            -	$            305,704	$            305,704	$            327,103	$        5,000,000	$        4,672,897
8	Dec 31, 2025	$            -	$            327,103	$            327,103	$                       -	$        5,000,000	$        5,000,000

B Company
Journal entries
Date	General Journal	Debit	Credit
Jan 1, 2018	Cash	2,910,046
	Discount on Bond payable	2,089,954
	Zero Coupon Bond payable		5,000,000
	(To record issued of zero coupon bond payable.) (Just provide for understand the whole concept. Not part of the answer.)
Dec 31, 2021	Interest expense	249,545
	Discount on Bond payable		249,545
	(To record interest expense.)
Dec 31, 2025	Interest expense	327,103
	Discount on Bond payable		327,103
	(To record interest expense.)
Dec 31, 2025	Zero Coupon Bond payable	5,000,000
	Cash		5,000,000
	(To record principal amount of Bond paid.)