Question

# Pearl Company sells 9% bonds having a maturity value of \$1,800,000 for \$1,731,764. The bonds are...

Pearl Company sells 9% bonds having a maturity value of \$1,800,000 for \$1,731,764. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.

a) Determine the effective-interest rate.

The effective-interest rate _______%

b) Set up a schedule of interest expense and discount amortization under the effective-interest method.

Schedule of Discount Amortization

Effective Interest Method

 Year Cash Paid Interest Expense Discount Amortized Carrying amount of bonds Jan. 1, 2017 Jan. 1, 2018 Jan. 1, 2019 Jan. 1, 2020 Jan. 1, 2021 Jan. 1, 2022

 a) The effective-interest rate 10% [(\$68,236/5 year) + \$162,000] / [(\$1,731,764 + \$1,800,000)/2] b) Year Cash Paid Interest Expense Discount Amortized Carrying amount of bonds Jan 1, 2017 \$1,731,764 Jan 1, 2018 \$162,000 \$173,176 \$11,176 \$1,742,940 Jan 1, 2019 \$162,000 \$174,294 \$12,294 \$1,755,234 Jan 1, 2020 \$162,000 \$175,523 \$13,523 \$1,768,758 Jan 1, 2021 \$162,000 \$176,876 \$14,876 \$1,783,634 Jan 1, 2022 \$162,000 \$178,366 \$16,366 \$1,800,000

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