Question
In: Accounting
On January 1, 2021, Darnell Window and Pane issued $18 million of 10-year, zero-coupon bonds for...
On January 1, 2021, Darnell Window and Pane issued $18 million of 10-year, zero-coupon bonds for $5,795,518. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
Required: 2. Determine the effective rate of interest. 1. & 3. to 5. Prepare the necessary journal entries
Solutions
Expert Solution
| 2)Effective rate of Interest : [Face value /issue price] ^1/n -1 |
| [ 18,000,000/ 5,795,518 ]^1/10 -1 |
| = [3.10585]^.10 -1 |
| = 1.12-1 |
| = .12 or 12% |
| Date | Account | debit($) | credit($) | |
| 1 | 01-01-2021 | Cash | 57,95,518 | |
| discount on bond payable | 1,22,04,482 | |||
| Bond payable | 1,80,00,000 | |||
| [Being zero coupon bond issued at discount) | ||||
| 3 | 31-12-2021 | Interest Expenses(5795518*12%) | 6,95,462 | |
| discount on bond payable | 6,95,462 | |||
| 4 | 31-12-2022 | Interest Expenses(64,90,980*12%) | 7,78,918 | |
| discount on bond payable | 7,78,918 | |||
| 5 | 31-12-2031 | Bond payable | 1,80,00,000 | |
| Cash | 1,80,00,000 | |||
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