Question

Assignment Gradebook ORION Downloadable eTextbook CALCULATOR FULL SCREEN PRINTER VERSION Brief Exercise 14-11 Metiock Corporation issued a 4-year, 585,000, zero-interest-bearing note to Brown Company on January 1, 2020, and received cash of $48,599. The implicit interest rate is 15% Prepare Metlock's journal entries for (a) the January 1 Issuance and (b) the December 31 recognition of interest. (Round answers to decimal places, e.g. 38,548. If no entry is required, select "No Entry for the account titles and enter for the amounts Credit accounties are automatically indented when amount is entered. Do not indent manually.) Date Account Tities and Explanation Credit Click t you would like to show Work for this question Open Show Work 1: 800BEEN mand command option

Answer 1

Metlock Corperation will pay the debenture holders $85,000 at the end of 4th year. There will not be any interest payments as the bond is a zero coupon bond. On issue the company received $48,599 but will pay $85,000 at the end of tenure, so the difference is actually the interest(or time value of money), but the same is not paid periodically. Initially discount on bond payable is recognised. 15% is the implicit rate of interest, thus on charging this rate, bond payable balance will be $85,000(maturity value) at the end of 4th year. Following are the journal entries:

a) Cash A/c Dr $48,599

Discount on bond payable Dr $36,401

To Zero coupon bond payable $85,000

b) Interest expense A/c Dr $7290

To Discount on bond payable $7290

Further below is the interest table for this zero coupon bond (Just for you reference and easy understanding) :

Date Bond Amortization table Opening Value Interest Expense Carrying value (End of period) (Carrying value x 15%) 31-12-2020 $ 48.599 S S 7.290 5 5.888.9 31-12-2021 $ 55,889S 8,383S 64,272.2 31-12-2022 S 64,272 S 9,641 $ 73,913.0 31-12-2023 S 73,913 11,087 85,000.0