On January 1, 20x5, North Company purchased a zero-coupon bond with the face value of $100,000, and classified it as AC security. The company was expecting a 5% rate of return because the market interest rate was 5% at the time the bond was purchased. The security would mature on December 31, 20x7. Round off all amounts to the nearest cents in answering the following questions.

Required:

a. Determine the amount that the company would have been willing to pay for the security on January 1, 20x5.

b. Prepare the bond discount amortization schedule.

Year	BV at the beginning	Interest revenue	BV at the end	Discount at the end
20x5
20x6
20x7

c. Prepare the entries necessary on the following dates:

December 31, 20x5 adjusting entry

December 31, 20x7 for the payment of the face value of the security.

December 31, 20x5

December 31,20x7

d. Assume that, instead of remaining stable at 5%, interest rates drop to 4.5% in 20x6, and that North Company sells the bond when the rates drop. What would you expect to happen to the net income of 20x6? Explain your answer.

e. Suppose now that instead of purchasing the zero-coupon bond, the company purchases an interest-paying bond with the face value of $100,000. While the market interest rate is 5%, the coupon of this bond is set at 2% which is to be paid annually over the life of the bond. The bond matures on December 31, 20x7. Determine the amount that the company pays for the interest-paying bond.

f. Calculate the interest revenue for 20x5 for the interest-paying bond above.

g. Calculate the book value of the interest-paying bond at 12/31/20x5.