Question

On January 1, 2021, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below: Payment Cash Payment Effective Interest Increase in Balance Outstanding Balance 4,893,518 1 280,000 293,611 13,611 4,907,129 2 280,000 294,428 14,428 4,921,557 3 280,000 295,293 15,293 4,936,850 4 280,000 296,211 16,211 4,953,061 5 280,000 297,184 17,184 4,970,245 6 280,000 298,215 18,215 4,988,460 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 38 280,000 397,547 117,547 6,743,328 39 280,000 404,600 124,600 6,867,928 40 280,000 412,072 132,072 7,000,000
Required:
1. What is the face amount of the bonds?
2. What is the initial selling price of the bonds?
3. What is the term to maturity in years?
4. Interest is determined by what approach?
5. What is the stated annual interest rate?
6. What is the effective annual interest rate?
7. What is the total cash interest paid over the term to maturity?
8. What is the total effective interest expense recorded over the term to maturity?

Answer 1

Answer:

1. $7,000,000

2. $4,893,518

3. 20 years

4. Effective interest method

5. 8%

6.12%

7.$11,200,000

8. $13,306,482

Explanation:

1. Based on the information given the Face amount of bonds will be $7,000,000

2. Based on the information given the initial selling price of the bonds will be $4,893,518

3.Calculation for the term to maturity in years

Term to maturity = 40/2

Term to maturity = 20 years

4. Based on the information given the Interest will be determined by using Effective interest method

5. Calculation for the stated annual interest rate

Stated annual interest rate = 280,000/7,000,000 = 4*2

Stated annual interest rate = 8%

6. Calculation for the effective annual interest rate

Effective interest rate = 293,611/4,893,518

Effective interest rate= 6*2

Effective interest rate= 12%

7. Calculation for the total cash interest paid over the term to maturity

Total cash paid for interest = 280000*40

Total cash paid for interest = $11,200,000

8. Calculation for the total effective interest expense recorded over the term to maturity

Total effective interest expense = $11,200,000+2,106,482

Total effective interest expense=$ 13,306,482

(4,893,518-7,000,000=2,106,482)