Question

Swifty Company sells 8% bonds having a maturity value of $2,650,000 for $2,356,174. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.

a. Determine the effective-interest rate.
The effective-interest rate =

b. Set up a schedule of interest expense and discount amortization under the effective-interest method.

Year	Cash Paid	Interest Expense	Discount Amortized	Carrying Amount of Bonds
Jan. 1, 2017
Jan. 1, 2018
Jan. 1, 2019
Jan. 1, 2020
Jan. 1, 2021
Jan. 1, 2022

Answer 1

First we need to calculate effective interest rate:
Discount amount at which bond issued = 2650000- 2356174 = $293826
Divide this discount amount from time period of bond = 293826 / 5 years = 58765.2
Interest amount = 2650000 *8% = 212000
Add discount amount to interest amount = 212000 +58765.2 = $270765.2
Divided this amount by average of bond face value and price at which it issued.
Average = (2650000 + 2356174) / 2 = 2503087
Interest rate = 270765.2 / 2503087 = 0.1081 or 10.81% which is near to 11%.

(You can check this 11% rate to calculate present value of bond and interest payments which must equal to price issued. I checked it.)
Effective interest rate is 11%.

b). Schedule of Interest expense and amortization of discount.