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

Homework Answers

Answer #2
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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