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.

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