Question

Blue 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%.)

The effective-interest rate

%

eTextbook and Media

  

  

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

Table values are based on:
Face Amount	$2,510,000
Interest Payment	$2,510,000*8% =$200,800
Market Interest rate per period	9.00%
Cash Flow	Table Value(PV of 10% for 5 period)	Amount	Present Value
PV of Interest	3.79079	$2,00,800	$7,61,191
PV of Principal	0.62092	$25,10,000	$15,58,509
PV of Bonds Payable(Issue Price)			$23,19,700
So the effective Interest rate is 10%
Date	Cash Paid	Interest expenses(Bond carrying amount*10%)	Discount amortized	Bond carrying amount
Col I	Col II	Col III	Col IV(Col III - Col II)	Col V
01-Jan-20				$                          23,19,700
31-Dec-20	$                                                               2,00,800	$                                                           2,31,970	$                                                     31,170	$                          23,50,870
31-Dec-21	$                                                               2,00,800	$                                                           2,35,087	$                                                     34,287	$                          23,85,157
31-Dec-22	$                                                               2,00,800	$                                                           2,38,516	$                                                     37,716	$                          24,22,872
31-Dec-23	$                                                               2,00,800	$                                                           2,42,287	$                                                     41,487	$                          24,64,360
31-Dec-24	$                                                               2,00,800	$                                                           2,46,440	$                                                     45,640	$                          25,10,000