Question

Problem 14-9 Zero-coupon bonds [LO14-2] On January 1, 2018, Darnell Window and Pane issued $18.5 million of 10-year, zero-coupon bonds for $6,515,413. (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. Complete this question by entering your answers in the tabs General Interest rateJournal Determine the effective rate of interest. nterest rate K Interest rate General Journal>

Answer 1

2)

Price of Bond = $6515413

Maturity (n) = 10 years

Face value of Bond = $18500000

Let effective rate of interest be r.

Price of Bond = Face value of Bond/ (1+r) ^n

$6515413 = $18500000/ (1+r) ^10

(1+r)^10 = $18500000/$6515413

(1+r)^10 = 2.8394

1+r = (2.8394) ^1/10

1+r = 1.11

r = 1.11 – 1 = 0.11 i.e. 11%

Effective rate of interest is 11%.

1) & (3 to 5)

Sl. NO.	Account Titles	Debit($)	Credit($)
1)	Cash	6515413
	Bond Payable		6515413
	(Issuance of Bond)
2)	Interest Expense	716695 (6515413*11%)
	Bond Payable		716695
	(Annual interest expense as at December 31,2018)
3)	Interest Expense	795532 [(6515413+716695)*11%]
	Bond Payable		795532
	(Annual interest expense as at December 31,2019)
4)	Bond Payable	18500000
	Cash		18500000
	(Payment at Bond maturity)