Question

Splish Company sells 8% bonds having a maturity value of $2,400,000 for $2,218,040. The bonds are dated January 1, 2020, and mature January 1, 2025. 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 %

Set up a schedule of interest expense and discount amortization under the effective-interest method. (Round intermediate calculations to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 38,548.) Schedule of Discount Amortization Effective-Interest Method Year Interest Payable Interest Expense Discount Amortized Carrying Amount of Bonds Jan. 1, 2020 $ $ $ $ Dec. 31, 2020 Dec. 31, 2021 Dec. 31, 2022 Dec. 31, 2023 Dec. 31, 2024 Click if you would like to Show Work for this question: Open Show Work

Answer 1

Under the effective interest method, the effective interest rate, which is a key component of the calculation, discounts the expected future cash inflows and outflows expected over the life of a financial instrument.Thus if Effective interest rate method is being followed , all the difference in the cash flows because of discounts or premium on financial instruments, gets its effect and thus no need to specifically give effect to discounts and premiums.

Answer 1:

Year	Cash Flow
0	2218040 ( Principal inflow)
1	192000 ( Interest outflow)
2	192000
3	192000
4	192000
5	2592000 ( interest plus principal outflow )

Thus the rate that equals the future cash flows with the inflow of 2218040 is 10%.

Justification:

Data Yo 1 Discounted CF disc @ 104. Cash flow G278,040 1,92, ooo 1,92, Qoo 1.92,000 1.92,000 25,42,000 0.909 0.826 0.7513 0.6830 0.6209 1174,528 1.58,592 1,44,250 1,31136 16,09,373 22,18,00 (Approx)

Answer 2:

Date Page Schedule :- Intrest Paid Discount year opening Intrest I laido Expense @ 10%. 2,21,804 Closing Amount 22,47,844 Amortised 1,92,000 o 2020 22.18.040 2,24,784 2021 22,47,844 1,92,000 22,80,629 o 2022 | 22,80,629 2,28, 063 192.000 23,16,6910 1,92,000 23,56,360 o 2023 23, 16,691 2,31,669 2024 23,56,360 1 2,35,636 1 1,92,000 24,00,000 o Nil. 2025 24.06 000 12025 124.00, 000 AS Repaid 24,00.000