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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