Zx issues a fixed-rate loan for 500,000 and incurs issue costs of 20,000, resulting in an initial carrying value of 480,000. The loan carries an…

Zx issues a fixed-rate loan for 500,000 and incurs issue costs of 20,000, resulting in an initial carrying value of 480,000. The loan carries an interest rate of 8% per annum, and it is repayable at par at the end of year 10. However, under the contract, Zx can call the loan at any time after year 4 by paying a fixed premium of 30,000. The fair value of the option is 10,000 at inception. The effective interest rate amounts to 8.30213%. Required: (ii) Explain the accounting of the loan when (a) In years 1 and 2, there is no change in interest rate since inception for an instrument of similar maturity and credit rating. The option's fair value (time value) at the end of year 2 is 6,000.