Question
P 14-4 On January 1, 2018, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June 30 and December 31. Portions of the
P 14-4
On January 1, 2018, 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 |
| 6,627,273 | ||||
| 1 | 320,000 | 331,364 | 11,364 | 6,638,637 |
| 2 | 320,000 | 331,932 | 11,932 | 6,650,569 |
| 3 | 320,000 | 332,528 | 12,528 | 6,663,097 |
| 4 | 320,000 | 333,155 | 13,155 | 6,676,252 |
| 5 | 320,000 | 333,813 | 13,813 | 6,690,065 |
| 6 | 320,000 | 334,503 | 14,503 | 6,704,568 |
| - | - | - | - | - |
| - | - | - | - | - |
| - | - | - | - | - |
| 38 | 320,000 | 389,107 | 69,107 | 7,851,247 |
| 39 | 320,000 | 392,562 | 72,562 | 7,923,809 |
| 40 | 320,000 | 396,191 | 76,191 | 8,000,000 |
- What is the face amount of the bonds?
- What is the initial selling price of the bonds?
- What is the term to maturity in years?
ANWSER: 20 years (40 semi-annual payments)
- Interest is determined by what approach?
- What is the stated annual interest rate?
- What is the effective annual interest rate?
ANSWER: 10% ($331,364 / $6,627,273) X 2 =10%
- What is the total cash interest paid over the term to maturity?
- What is the total effective interest expense recorded over the term to maturity?
ANSWER: $14,172,727 ($12,800,000* + ($8,000,000 - $6,627,273) *$12,800,000 = $320,000 X 40
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