a) In year one, January 1, company A issues a zero coupon bond payable at $600,000 that is due in 7 years. Assume effective annual interest rate is 5% and present value of $1 in 7 years at a 5% interest rate is 0.715. The investor wants to earn annual interest at 8%. Assume that the present value of $1 in 7 years at an 8% interest rate is 0.595.

The effective rate method is used. Company A decides to accept the 8% rate and the company issues the bond to the investor. What will Company A report as the liability for this bond payable at December 31, Year One on the balance sheet?

b) Assume that an investor paid $27,737 for a zero-coupon bond with a face value of $30,000. The effective interest rate was 4%. What is the interest expense for first year using the effective interest rate method?