Question

Clark Company sells 8% bonds having a maturity value of $5,000,000 for $5,421,236. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1. Set up a schedule of interest expense and premium amortization under the effective-interest method. (Hint: The effective interest rate must be computed.)

Answer 1

Answer:

attached table

Explanation:

We use goal seek of excel to determinate the market rate:

Which is the rate that discounting the coupon payment and maturity matches the 5,421,236 we receive for the bond:

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 200,000.000

time 10

rate 0.030117724

$200000 \times \frac{1-(1+0.0301177235440986)^{-10} }{0.0301177235440986} = PV$

PV $1,705,016.0533

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity   5,000,000.00

time   10.00

rate  0.030117724

$\frac{5000000}{(1 + 0.0301177235440986)^{10} } = PV$  

PV   3,716,219.95

PV c $1,705,016.0533

PV m  $3,716,219.9467

Total $5,421,236.0000

Now, we determiante the schedule by doing as follow:

carrying value x market rate = interest expense

cash outlay per period: face value x coupon rate

the amortization will be the difference

after each payment we adjust the carrying value by subtracting the amortization