The following is the amortization schedule using effective-interest method for a zero coupon bond. The historical rate of interest at the time of issuance is 9%.

	Cash Paid	Interest Expense	Discount Amortization	Carrying Value
Date of issuance				7,722
End of year 1	0	695	695	8,417
End of year 2	0	757	757	9,174
End of year 3	0	826	826	10,000

The market interest rate remains flat at 9% for the first year. Then on January 1, Year 2, interest rate rises to 10%, and remains at 10% going forward.

The company maintains the zero coupon bond using the fair value option on their Balance Sheet. As such, there are deferred tax consequences, as IRS uses historical cost accounting to calculate interest expense on tax returns. Tax rate is 20% for all years involved.

REQUIRED: Fill in the blanks below (round to the nearest dollar, and do not put a dollar sign in front of your numbers.

To help you with your PV calculation, here are the PVs of $1 discounted at 10% for 3 periods:

N=1, PV = .90909; N=2, PV = .82645; N=3, PV = .75132.

Bonds payable on Balance Sheet as of:	Under Fair Value Accounting (Book, at 10%)	Under Historical Cost Accounting (Tax Returns, at historical rate of 9%)
January 1, Year 2		8,417
December 31, Year 2		9,174

The increase in market interest rate leads to an UHG or UHL? _________

The book-tax difference incurred on January 1, Year 2 leads to a (DTA or DTL???) _______, because Book Liability is (greater or less?) ________ than Tax Liability.

The income tax journal entry for Year 2 includes an increase or decrease ________? to Income Tax Payable of ____________

Assume the company early retires the debt on Day 1 of Year 3. This early retirement of the debt will result in a (taxable or deductible??) _______amount of _________