Question

On January 1, 2018, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below:
     

Payment	Cash Payment		Effective Interest		Increase in Balance		Outstanding Balance
							6,627,273
1	320,000		331,364		11,364		6,638,637
2	320,000		331,932		11,932		6,650,569
3	320,000		332,528		12,528		6,663,097
4	320,000		333,155		13,155		6,676,252
5	320,000		333,813		13,813		6,690,065
6	320,000		334,503		14,503		6,704,568
~	~		~		~		~
~	~		~		~		~
~	~		~		~		~
38	320,000		389,107		69,107		7,851,247
39	320,000		392,562		72,562		7,923,809
40	320,000		396,191		76,191		8,000,000

Required:
1. What is the face amount of the bonds?
2. What is the initial selling price of the bonds?
3. What is the term to maturity in years?
4. Interest is determined by what approach?
5. What is the stated annual interest rate?
6. What is the effective annual interest rate?
7. What is the total cash interest paid over the term to maturity?
8. What is the total effective interest expense recorded over the term to maturity?

Answer 1

						Answers
1)	Face amount of the bonds					8,000,000
2)	initial selling price of bonds					6,627,273
3)	Term of maturity in years					20	years
4)	interest is determined by				Effective interest method
5)	Stated annual interest rate
	320,000/8,000,000
	4%
	4% *2					8%	answer
6)	Effective annual interest rate
	331,364/6627273
	5%
	5%*2					10%	Answer
7)	total cash interest paid
	320,000*40					12,800,000	answer
8)	total interest expense recorded
	cash interest paid				12,800,000
	Face value of bonds				8,000,000
	total paid				20,800,000.00
	less cash received				6,627,273
	interest expense paid				14,172,727	14,172,727	answer