Question

On January 1, 2021, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June...

On January 1, 2021, 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
6,978,029
1 261,000 279,121 18,121 6,996,150
2 261,000 279,846 18,846 7,014,996
3 261,000 280,600 19,600 7,034,596
4 261,000 281,384 20,384 7,054,980
5 261,000 282,199 21,199 7,076,179
6 261,000 283,047 22,047 7,098,226
~ ~ ~ ~ ~
~ ~ ~ ~ ~
~ ~ ~ ~ ~
38 261,000 338,343 77,343 8,535,913
39 261,000 341,437 80,437 8,616,350
40 261,000 344,650 83,650 8,700,000

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?

Homework Answers

Answer #1
1 Face amount of the bonds $8,700,000
2 Initial selling price of the bonds $6,978,029
3 Term to maturity in years (40/2) 20
4 Effective Interest Method
5 Stated annual interest rate 6.00%
6 Effective annual interest rate 8.00%
7 Total cash interest paid $10,440,000
8 Total effective interest expense $12,161,971
1 Face amount of the bonds 8700000
2 Initial selling price of the bonds 6978029
3 Term to maturity in years (40/2) =40/2
4 Effective Interest Method
5 Stated annual interest rate =261000/8700000*2
6 Effective annual interest rate =279121/6978029*2
7 Total cash interest paid =261000*40
8 Total effective interest expense =10440000+(8700000-6978029)
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