Exercise 14-7 Pronghorn Company sells 8% bonds having a maturity value of $1,500

Question

Exercise 14-7 Pronghorn Company sells 8% bonds having a maturity value of $1,500,000 for $1,386,275. 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%.) The effective-interest rate LINK TO TEXT 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 o decimal places, e.g. 38,548.) Schedule of Discount Amortization Effective-Interest Method Cash Paid Interest Expense Discount Amortized Carrying Amount of Bonds Year Jan. 1, 2017 Jan. 1, 2018 Jan. 1, 2019 Jan. 1, 2020 Jan. 1, 2021 Jan. 1, 2022

Explanation / Answer

Question - 1 ...........effective annual rate = Yield to maturity = 10%

120,000 ( 1 - (1+r)-5 / r ) + 1500,000 ( 1 + r)-5 = 1386275 ............ this equation is solve when r = 10%

Question - 2 .......

Year Cash paid Int Exp Dis Amrt Carrying Jan 1 2017 0 0 0 1386275 Jan 1 2018 120000 138628 18628 1404903 Jan 1 2019 120000 140490 20490 1425393 Jan 1 2020 120000 142539 22539 1447932 Jan 1 2021 120000 144793 24793 1472725 Jan 1 2022 120000 147273 27273 1499998

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