Question

Discount-Mart issued ten thousand $1,000 bonds on January 1, 2021. The bonds have a 10-year term and pay interest semiannually. This is the partial bond amortization schedule for the bonds. Payment Effective Interest Decrease in Balance Cash HM 300,000 300,000 300,000 300,000 345,639 347,464 349,363 45,639 47,464 49,363 Outstanding Balance 8,640,967 8,686,606 8,734,070 8,783,433

What is the stated annual rate of interest on the bonds?

What is the interest expense on the bonds for the year ended December 31, 2022?

Answer 1

Answer

• $ 300000 Cash is the six monthly semi annual interest amount.
• Annual interest = $ 300000 x 2 = $ 600000
• Bond face value = 10000 bonds x $ 1000 = $ 10,000,000
• Effective market rate = [($345639 / $ 8640967) x 100] x 2 = 8%
• Answer [1]
  Stated Annual rate of Interest = ($600000 annual interest / $ 10000000 bond face value) x 100
  = 6%
• Answer [2]
  Interest Expense for year ended 31 Dec 2022 = Payment 3 + Payment 4 Effective interest
  = $ 349363 + ($8783433 x 8% x 6/12)
  = 349363 + 351337
  = $ 700,700