Question

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

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

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

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