Question

On January 1, 2021, 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 6,978,029 1 261,000 279,121 18,121 6,996,150 2 261,000 279,846 18,846 7,014,996 3 261,000 280,600 19,600 7,034,596 4 261,000 281,384 20,384 7,054,980 5 261,000 282,199 21,199 7,076,179 6 261,000 283,047 22,047 7,098,226 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 38 261,000 338,343 77,343 8,535,913 39 261,000 341,437 80,437 8,616,350 40 261,000 344,650 83,650 8,700,000 Required: 1. What is the face amount of the bonds

Answer 1

Answer:

1. Face amount of the bond = $8,700,000

2. Initial selling price of the bond = $6,978,029

3. Term to maturity in years = 20 years

4. The interest is determined by effective interest method.

5. Stated annual interest rate = 6%

6. Effective annual interest rate = 8%

7. Total cash interest paid over the term to maturity = $10,440,000

8. Total effective interest expense recorded = $12,161,971

Explanation:

Note: This question is not complete. The complete question is therefore provided before answering the question. See the attached pdf file for the complete question.

The explanation of the answer is now given as follows:

1. What is the face amount of the bonds?

Face amount of the bond = Semiannual 40 outstanding balance = $8,700,000

2. What is the initial selling price of the bonds?

Initial selling price of the bond = Semiannual 0 Outstanding balance = $6,978,029

3. What is the term to maturity in years?

Term to maturity in years = Number of semiannuals / Number of semiannuals in a yeat = 40 / 2 = 20 years

4. Interest is determined by what approach?

Given the information in the question, the interest is determined by effective interest method.

5. What is the stated annual interest rate?

Stated annual interest rate = (Semiannual cash payment / Face amount of the bond) * Number of semiannuals in a year = ($261,000 / $8,700,000) * 2 = 0.06, or 6%

6. What is the effective annual interest rate?

Effective annual interest rate = (Semiannual 1 effective interest / Initial selling price of the bond) Number of semiannuals in a year = ($279,121 / $6,978,029) * 2 = 0.08, or 8%

7. What is the total cash interest paid over the term to maturity?

Total cash interest paid over the term to maturity = Semiannual cash payment * Number of semiannuals = $261,000 * 40 = $10,440,000

8. What is the total effective interest expense recorded over the term to maturity?

Total effective interest expense recorded = Total cash interest paid over the term to maturity + (Face amount of the bond - Initial selling price of the bond) = $10,440,000 + ($8,700,000 - $6,978,029) = $12,161,971