A Notice Appeared in the Grant Street Times Stating That

question 171

Essay

A notice appeared in the Grant Street Times stating that Dollar Savings Association of Texas was issuing $2.9 billion in zero coupon bonds."The Bonds do not pay interest periodically.The only scheduled payment to the holder of a Bond will be the amount at maturity," the ad read.The details of two components of the issue were as follows: $500,000,000 Bonds due December 12,2017,at 3.254; $500,000,000 Bonds due December 12,2027,at 1.380; plus accrued amortization,if any,of the original issue discount from December 12,1987,to date of delivery.
a.Assuming all the bonds were issued on December 12,1987,prepare entries in journal form to record each component shown above.

b.Determine the approximate market interest rate on each of the two components of the bond issue.Assume that interest is compounded annually.Use Table 3 in the appendix on future value and present value tables.
c.Prepare entries in journal form to record bond interest expense for each of the first two years (December 12,1988 and 1989)on the component of the bond due in 2017 (ignore effects of fiscal year ends).What advantages or disadvantages are there to Dollar in issuing zero coupon bonds?

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Definitions:

Internal Control

A process designed to ensure the reliability of financial reporting, compliance with laws and regulations, and effective and efficient operations.

Significant Accounting Policies

These are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements.

Financial Statements

Reports that provide detailed information about a company's financial status, including its income, expenses, equity, and cash flows, over a particular period.

Statement of Cash Flow

A financial report that details the inflows and outflows of cash within a company, highlighting its operating, investing, and financing activities.