Question

Swifty Company sells 10% bonds having a maturity value of $2,600,000 for $2,503,904. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.

A. Swifty Company sells 10% bonds having a maturity value of $2,600,000 for $2,503,904. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.

B. Set up a schedule of interest expense and discount amortization under the effective-interest method. (Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer to 0 decimal places, e.g. 38,548.)

year	cash paid	intrest expense	discount amortized	carrying amunt of bonds
2017	0			2503904
2018	260,000
2019	260,000
2020	260,000
2021	260,000
2022	260,000

Answer 1

Solution:

Issu price of bond = $2,503,904

Face value of bond = $2,600,000

Discount on issue of bond = $2,600,000 - $2,503,904 = $96,096

Coupon rate = 10%

Let effective interest rate is i.

Now at effective interest rate present value of future interest and principal amount will be equal to issue price of bond.

Lets calculate present value of interest payment and principal amount at 11% =

$260,000 * cumulative PV factor at 11% for 5 period + $2,600,000 * PV factor at 5 periods at 11%

= $260,000 * 3.69589 + $2,600,000 * 0.59345 = $2,503,904

As present value at 11% is equal to issue price bond, therefore effective interest rate is 11%.

Schedule of Interest Expense & Discount Amortization
Year	Cash Paid (2600000*10%)	Interest Expense (Carrying amount *11%)	Discount Amortized (Interest Expense - Cash Paid)	Carrying amount of bond
2017				$2,503,904
2018	$260,000	$275,429	$15,429	$2,519,333
2019	$260,000	$277,127	$17,127	$2,536,460
2020	$260,000	$279,011	$19,011	$2,555,471
2021	$260,000	$281,102	$21,102	$2,576,573
2022	$260,000	$283,427	$23,427	$2,600,000