Question

Problem 14-4 Bond amortization schedule [LO14-2]

On January 1, 2018, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below:

Payment		Cash Payment		Effective Interest		Increase in Balance		Outstanding Balance
								6,095,749
1		228,000		243,830		15,830		6,111,579
2		228,000		244,463		16,463		6,128,042
3		228,000		245,122		17,122		6,145,164
4		228,000		245,807		17,807		6,162,971
5		228,000		246,519		18,519		6,181,490
6		228,000		247,260		19,260		6,200,750
~		~		~		~		~
~		~		~		~		~
~		~		~		~		~
38		228,000		295,564		67,564		7,456,656
39		228,000		298,266		70,266		7,526,922
40		228,000		301,078		73,078		7,600,000

Required:
1. What is the face amount of the bonds?
2. What is the initial selling price of the bonds?
3. What is the term to maturity in years?
4. Interest is determined by what approach?
5. What is the stated annual interest rate?
6. What is the effective annual interest rate?
7. What is the total cash interest paid over the term to maturity?
8. What is the total effective interest expense recorded over the term to maturity?

Answer 1

Answer:- 1)-The face amount of the bonds is $7,600,000.

2)- The initial selling price of the bonds is $6,095,749.

3)- The term to maturity in years is 20 years.

4)- Interest is determined by Effective Interest rate approach.

5)- The stated annual interest rate is 6%.

Explanation:- Annual interest rate is {($228000/$7600000*100)*2}

                  =6%

6)- The effective annual interest rate is 8%.

Explanation:- Effective Annual interest rate is ($243830/$6095749*100)*2

                  =8%

7)- The total cash interest paid over the term to maturity is $228000*40 = $9120000.

8)- The total effective interest expense recorded over the term to maturity is

   =$10624251

Explanation:-Effective interest expense (ie-Total cash interest + Discount)

= {$9120000+($7600000-$6095749)}

=$10624251