Question

Bonita Company sells 8% bonds having a maturity value of $1,420,000 for $1,312,340. The bonds are dated January 1, 2020, and mature January 1, 2025. Interest is payable annually on January 1.

Determine the effective-interest rate. (Round answer to 0 decimal places, e.g. 18%.)

The effective-interest rate

%

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Set up a schedule of interest expense and discount amortization under the effective-interest method. (Round intermediate calculations to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 38,548.)

Schedule of Discount Amortization Effective-Interest Method
Year		Interest Payable		Interest Expense		Discount Amortized		Carrying Amount of Bonds
Jan. 1, 2020		$		$		$		$
Dec. 31, 2020
Dec. 31, 2021
Dec. 31, 2022
Dec. 31, 2023
Dec. 31, 2024

Answer 1

The effective-interest rate = 10%
(Using financial calculator)
Year	Interest Payable	Interest Expense	Discount Amortized	Carrying Amount of Bonds
Jan. 1, 2020				1,312,340
Dec. 31, 2020	113,600	131,234	17,634	1,329,974
Dec. 31, 2021	113,600	132,997	19,397	1,349,371
Dec. 31, 2022	113,600	134,937	21,337	1,370,709
Dec. 31, 2023	113,600	137,071	23,471	1,394,179
Dec. 31, 2024	113,600	139,421	25,821	1,420,000
Interest Payable = 1,420,000 x 8% = 113,600
Interest Expense = 1,312,340 x 10% = 131,234
Discount Amortized = Interest Expense - Interest Payable