Question

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

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.

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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