Question

On January 1, 2021. Darnell Window and Pane issued $19.3 million of 10-year, zero- coupon bonds for $6,214,083. Required: 1. Determine the effective rate of interest. 2. Prepare the necessary journal entries a. Record the issuance of the bonds on Jan 1.2021. b. Record the annual interest expense at Dec 31, 2021. c. Record annual interest expense at Dec 31, 2022. d. Record the payment at the bond's maturity on Dec 31, 2030. Page 2 of 2 231 words 9:17 AM 1/29/2020

Answer 1

Answer to Requirement 1:

Face Value of Bonds = $19,300,000
Issue Value of Bonds = $6,214,083
Time to Maturity = 10 years

Effective Interest Rate = (Face Value of Bonds / Issue Value of Bonds) ^ (1 / Time to Maturity) - 1
Effective Interest Rate = ($19,300,000 / $6,214,083) ^ (1 / 10) - 1
Effective Interest Rate = 3.105848 ^ (1 / 10) - 1
Effective Interest Rate = 1.12 - 1
Effective Interest Rate = 0.12 or 12.00%

Answer to Requirement 2:

Credit General Journal Debit Date Cash Jan. 01, 2021 6,214,083 $ 13,085,917 Discount on Bonds Payable Bonds Payable Dec. 31, 2021 Interest Expense ($6,214,083 * 12%) Discount on Bonds Payable Dec. 31, 2022 Interest Expense ($6,959,773 * 12%) $ 19,300,000 745,690 745,690 835,173 Discount on Bonds Payable 835,173 Dec. 31, 2021 Bonds Payable $ 19,300,000 $ 19,300,000 Cash