Exercise 14B-7 Sheffield Company sells 8% bonds having a maturity value of $2,65

Question

Exercise 14B-7 Sheffield Company sells 8% bonds having a maturity value of $2,650,000 for $2,356,174. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1. Your answer is incorrect. Try again. Determine the effective-interest rate. (Round answer to 0 decimal places, e.g. 18%.) The effective-interest rate 811 % LINK TO TEXT Your answer is incorrect. Try again. 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.) Schedule of Discount Amortization Effective-Interest Method Cash Paid Interest Expense Discount Amortized Carrying Amount of Bonds Year Jan. 1, 2017

Explanation / Answer

Y=[I+(P-M)/N]/(P+M)/2 Y = Effective interest rate N = Number of periods of interest payment=5 M = Amount paid/received at date of purchase/sale=2356174 P = Face/Maturity value (final lump-sum payment)=2650000 I = Amount of income received/paid per compounding period =2650000*8%=212000 Y=[212000+(2650000-2356174)/5]/(2356174+2650000)/2=10.82%=11% Schedule of interest expense and discount amortization: A B C D E Year Cash paid Interest expense Discount amortized Carriying Amount of bonds (Fce value * 8%) (previous value in E*11%) [B-C] Previous balance+ D Jan 1,2017 2356174 Jan 1,2018 212000 259179 47179 2403353 Jan 1,2019 212000 264369 52369 2455722 Jan 1,2020 212000 270129 58129 2513851 Jan 1,2021 212000 276524 64524 2578375 Jan 1,2022 212000 283621 71621 2649996 (Diff of $4 is due to round off)

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