Question

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

Answer 1

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

answered by: anonymous