Question

Spencer Company sells 10% bonds having a maturity value of $3,000,000 for $2,783,724. The bonds are dated January 1, 2012, and mature January 1, 2017. Interest is payable annually on January 1. Instructions Set up a schedule of interest expense and discount amortization under the effective-interest method. (Hint: The effective-interest rate must be computed.)

How do you get the effective rate? I know it is 12%. Can someone please explain it.

Answer 1

Schedule of Discount amortization ( effective interest method)(12% )
Year	Cash paid	Interest expense	Discount amortized	Carring amount of bonds
Jan 1 , 2012				$ 2,783,724
Dec 31,2012	$ 300,000          {$ 3,000,000*10% }	$ 334,046.88        {$2,783,724*12%}	$34,046.88   {$ 334,046.88 - $300,000}	$ 2,817,770.88      {$ 2,783,724+$ 34,046.88}
Dec 31,2013	$ 300,000          {$ 3,000,000*10% }	$ 338,132.51       {$ 2,817,770.88*12%}	$ 38,132.51   { $338,132.51 - $300,000}	$ 2,855,903.39     {$ 2,817,770.88 +$38,132.51 }
Dec 31,2014	$ 300,000          {$ 3,000,000*10% }	$ 342,708.41        {$ 2,855,903.39 *12%}	$ 42,708.41   {$342,708.41 -$ 300,000}	$ 2,898,611.80      {$2,855,903.39+$42,708.41}
Dec 31,2015	$ 300,000          {$ 3,000,000*10% }	$ 347,833.42        {$ 2,898,611.80 *12%}	$ 47,833.42    {$347,833.42 -$300,000}	$ 2,946,445.22      {$ 2,898,611.80+$47,833.42}
Dec 31,2016	$ 300,000          {$ 3,000,000*10% }	$ 353,573.43        {$ 2,946,445.22 *12%}	$ 53,573.43    {$353,573.43 -$300,000}	$ 3,000,000            {$2,946,445.22+$ 53,573.43}