Question

Windsor Company sells 8% bonds having a maturity value of $1,400,000 for $1,244,771. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.

Determine the effective-interest rate. (Round answer to 0 decimal places, e.g. 18%.)

1)The effective-interest rate:-

2)Set up a schedule of interest expense and discount amortization under the effective-interest method. (Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer to 0 decimal places, e.g. 38,548.)

from 2017 to 2021 cashpaid interst expense discount amortized carrying amount of bond

Answer 1

Answer 1.

Face Value of Bonds = $1,400,000
Current Value of Bonds = $1,244,771

Annual Coupon Rate = 8.00%
Annual Coupon = 8.00% * $1,400,000
Annual Coupon = $112,000

Time to Maturity = 5 years

Let Effective Interest Rate be i%

$1,244,771 = $112,000 * PVA of $1 (i%, 5) + $1,400,000 * PV of $1 (i%, 5)

Using financial calculator:
N = 5
PV = -1244771
PMT = 112000
FV = 1400000
I = 11%

Effective Interest Rate = 11%

Answer 2.