Question

Martinez Company sells 8% bonds having a maturity value of $2,510,000 for $2,319,700. 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%.) 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.)

Answer 1

Calculator
Inputs:
PV	(2,319,700)
PMT	200,800
FV	2,510,000
N	5
Output:
I/Y = IRR=	10.00%

YTM of bonds is 10%.

Amortization schedule is:

Period	Opening balance-Liability	Opening balance-Discount	Cash paid	Interest expense debit	Change in carrying value	Carrying value	Closing balance-Discount
		A	B	D	C= A* 10.00%	E=C-D	F=A+E	G=B-E
Jan. 1	2021	2,319,700.00	190,297.50	200,800.00	231,970.00	31,170.00	2,350,870.00	159,127.50
Jan. 1	2021	2,350,870.00	159,127.50	200,800.00	235,087.00	34,287.00	2,385,157.00	124,840.50
Jan. 1	2022	2,385,157.00	124,840.50	200,800.00	238,515.70	37,715.70	2,422,872.70	87,124.80
Jan. 1	2022	2,422,872.70	87,124.80	200,800.00	242,287.27	41,487.27	2,464,359.97	45,637.53
Jan. 1	2023	2,464,359.97	45,637.53	200,800.00	246,436.00	45,636.00	2,509,995.97	1.53