Question

Clark Company sells 8% bonds having a maturity value of $5,000,000 for $5,421,236. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1. Set up a schedule of interest expense and premium amortization under the effective-interest method. (Hint: The effective interest rate must be computed.)

Answer 1

attached table

Step-by-step explanation:

We use goal seek of excel to determinate the market rate:

Which is the rate that discounting the coupon payment and maturity matches the 5,421,236 we receive for the bond:

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

C 200,000.000

time 10

rate 0.030117724

`200000 * (1-(1+0.0301177235440986)^(-10) )/(0.0301177235440986) = PV\\`

PV $1,705,016.0533

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity 5,000,000.00

time 10.00

rate 0.030117724

`(5000000)/((1 + 0.0301177235440986)^(10) ) = PV`

PV 3,716,219.95

PV c $1,705,016.0533

PV m $3,716,219.9467

Total $5,421,236.0000

Now, we determiante the schedule by doing as follow:

carrying value x market rate = interest expense

cash outlay per period: face value x coupon rate

the amortization will be the difference

after each payment we adjust the carrying value by subtracting the amortization