Question

ACTG 321 HW 2: Zero-interest bearing note Due date: See the announcement on the D2L Name: * This homework accounts for 5 points. No point will be given if the assignment is past due or incomplete, no work is provided, answers are not specified, or most work is incorrect. One or more points will be deducted if any of your work or answers is incorrect. Sugarland Co. agreed to loan Colby Retail Inc. On 1/1/Year 1. Colby gave a $ 86,000 zero interest-bearing note due in 5 years to Sugarland. Assume that the market interest rate to discount the note is 6%. Instructions: a. Determine the present value of the zero-interest bearing note. You should use an appropriate factor (five decimal places) from tables in Ch. 6. Answer: b. Record the joumal entry Sugarland (i.e. the lender) would make to record the receipt of the note on 1/1/Year 1. Do not provide journal entry from other dates or points will be deducted. Account title Debit Credit Date c. Prepare an amortization schedule for the note using the effective interest method. Year Cash Interest Interest revenue Discount Carrying amount amortized of note Date of receipt End of year 1 End of year 2 End of year 3 End of year 4 End of year 5

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

A B с D Answer Part 1) Present value of zero interest bearing note = face value of note /(1+i)^n = 86000/(1+6%)^5 = 86000 / 1.33823 = $ 64264 . So the correct answer is $ 64264 1 2 Part 2) 3 Date Account Title 4 1/1/Year 1 Zero interest bearing note receivable Discount on zero percent bond 5 Cash Issue of zero percent bonds) Debit Credit 86000 21736 64264 7 3

A B E 2 Part 3) Cash interest Interest Revenue (CARRYING VALUE *6%) Discount Amortized INTEREST REVENUE - CASH INETREST) Carrying amount of note previous balance + discount amortized for the period) 64264 68120 72207 0 3856 Year 5 Date of receipt 5 End of Year 1 - End of Year 2 End of Year 3 End of Year 4 0 End of Year 5 0 4087 3856 4087 4332 4592 0 4332 76539 0 4592 81131 86000 0 4869 4869 1