Question

Larkspur Company sells 8% bonds having a maturity value of $2,000,000 for $1,848,366. 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

   

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

Solution 1:

Period	Cash Flows	Effective Interest rate
0	1848366	10.00%
1	-160000
2	-160000
3	-160000
4	-160000
5	-2160000

2.

Bond Amortization Schedule
Date	Interest payable	Interest Expense	Discount amortized	Carrying Amount
01-Jan-20				$18,48,366
31-Dec-20	$1,60,000	$1,84,837	$24,837	$18,73,203
31-Dec-21	$1,60,000	$1,87,320	$27,320	$19,00,523
31-Dec-22	$1,60,000	$1,90,052	$30,052	$19,30,575
31-Dec-23	$1,60,000	$1,93,058	$33,058	$19,63,633
31-Dec-24	$1,60,000	$1,96,367	$36,367	$20,00,000