How do you compute the effective interest rate? Please show it step by step. I g
ID: 2553263 • Letter: H
Question
How do you compute the effective interest rate? Please show it step by step. I got 11.8696 arithmetically.
Devon Harris Company sells 10% bonds having a maturity value E14-6 (LO 1) (Amortization Schedule-Straight-line) of $2,000,000 for $1,855,816. The bonds are dated January 1,2017, and mature January 1, 2022. Interest is payable annually on January 1 Instructions Set up a schedule of interest expense and discount amortization under the straight-line method. (Round answers to the nearest cent.) E14-7 (LO (Amortization Schedule-Effective-Intere Assume the same information as E14-6. Instructions Hint: The effective-interest Set up a schedule of interest expense and discount amortization under the effective-interest method. rate must be computed.)Explanation / Answer
Set up a schedule of interest expense and discount amortization under straight line method:
Year
Cash paid [2000000*10%]
Discount amortized [2000000-1855816]/5
Interest expense
Carrying amount of bonds
[1]
[2]
[3]=[1+2]
[4]
Jan 1 2017
1855816
Dec 31 2017
200000
28836.8
228836.8
1884652.8
Dec 31 2018
200000
28836.8
228836.8
1913489.6
Dec 31 2019
200000
28836.8
228836.8
1942326.4
Dec 31 2020
200000
28836.8
228836.8
1971163.2
Dec 31 2021
200000
28836.8
228836.8
2000000
Set up a schedule of interest expense and discount amortization under Effective interest method:
Year
Cash paid [2000000*10%]
Interest expense
Discount amortized
Carrying amount of bonds
[1]
[2] = 4*12%
[3] = 2-1
[4]
Jan 1 2017
1855816
Dec 31 2017
200000
222697.92
22697.92
1878513.92
Dec 31 2018
200000
225421.67
25421.67
1903935.59
Dec 31 2019
200000
228472.27
28472.27
1932407.86
Dec 31 2020
200000
231888.94
31888.94
1964296.80
Dec 31 2021
200000
235715.62
35703.20
2000000.00
1855816*0.12 =$22697.92
Set up a schedule of interest expense and discount amortization under straight line method:
Year
Cash paid [2000000*10%]
Discount amortized [2000000-1855816]/5
Interest expense
Carrying amount of bonds
[1]
[2]
[3]=[1+2]
[4]
Jan 1 2017
1855816
Dec 31 2017
200000
28836.8
228836.8
1884652.8
Dec 31 2018
200000
28836.8
228836.8
1913489.6
Dec 31 2019
200000
28836.8
228836.8
1942326.4
Dec 31 2020
200000
28836.8
228836.8
1971163.2
Dec 31 2021
200000
28836.8
228836.8
2000000
Set up a schedule of interest expense and discount amortization under Effective interest method:
Year
Cash paid [2000000*10%]
Interest expense
Discount amortized
Carrying amount of bonds
[1]
[2] = 4*12%
[3] = 2-1
[4]
Jan 1 2017
1855816
Dec 31 2017
200000
222697.92
22697.92
1878513.92
Dec 31 2018
200000
225421.67
25421.67
1903935.59
Dec 31 2019
200000
228472.27
28472.27
1932407.86
Dec 31 2020
200000
231888.94
31888.94
1964296.80
Dec 31 2021
200000
235715.62
35703.20
2000000.00
1855816*0.12 =$22697.92
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