Question

Sage Company sells 8% bonds having a maturity value of $2,510,000 for $2,319,700. 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.

Answer 1

Answer:

The effective-interest rate: 10%

Step 1: Discount on bonds payable = $2510000-2319700 = 190300

Step 2: Discount on bonds payable/Number of annual payments remaining = $190300/5 = $38060

Step 3: Annual interest payment = $2510000 x 8% = $200800

$38060 + $200800 = $238860

Step 4: Average of face value and sale price = ($2510000 + $2319700)/2 = $2414850

$238860/$2414850 = 0.0989

Effective interest rate = 9.89% = 10%

Schedule of Discount Amortization
Effective-Interest Method
Year	Interest Payable	Interest Expense	Discount Amortized	Carrying Amount of Bonds
Jan. 1, 2020				2319700
Dec. 31, 2020	200800	231970	31170	2350870
Dec. 31, 2021	200800	235087	34287	2385157
Dec. 31, 2022	200800	238516	37716	2422873
Dec. 31, 2023	200800	242287	41487	2464360
Dec. 31, 2024	200800	246436	45636	2509996

Kindly round off appropriately.