Question

Waterway Company sells 10% bonds having a maturity value of
$2,200,000 for $2,118,688. The bonds are dated January 1, 2017, and
mature January 1, 2022. 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

10

%

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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.)

Schedule of Discount Amortization

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

where i=11% | |||||||

t =5 years | |||||||

principal | |||||||

2,200,000 | *59345 | 1305590 | |||||

interest | |||||||

220,000 | *3.69590 | 813098 | |||||

2118688 | |||||||

thus effective interest rate = | 11% | answer | |||||

year | cash | interest | Discount | Carrying | |||

paid | expense | amortized | value | ||||

10% | 11% | ||||||

1/1/2017 | 2118688 | ||||||

1/1/2018 | 220000 | 233056 | 13056 | 2131744 | |||

1/1/2019 | 220000 | 234492 | 14492 | 2146235 | |||

1/1/2020 | 220000 | 236086 | 16086 | 2162321 | |||

1/1/2021 | 220000 | 237855 | 17855 | 2180177 | |||

1/1/2022 | 220000 | 239823 | 19823 | 2200000 | |||

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