Question

# Cheyenne Company sells 8% bonds having a maturity value of \$2,400,000 for \$2,218,040. The bonds are...

Cheyenne Company sells 8% bonds having a maturity value of \$2,400,000 for \$2,218,040. 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 %

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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

Face Value of Bonds = \$2,400,000
Issue Value of Bonds = \$2,218,040

Annual Coupon Rate = 8.00%
Annual Coupon = 8.00% * \$2,400,000
Annual Coupon = \$192,000

Time to Maturity = 5 years

Let Effective Interest Rate be i%

\$2,218,040 = \$192,000 * PVA of \$1 (i%, 5) + \$2,400,000 * PV of \$1 (i%, 5)

Using financial calculator:
N = 5
PV = -2218040
PMT = 192000
FV = 2400000

I = 10%

Effective Interest Rate = 10%

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