On January 1, 2018, Tennessee Harvester Corporation issued debenture bonds that

Question

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: Effective Increase in Outstanding Cash Payment Payment Interest Balance 6,286,574 6, 293,768 6, 301, 394 6,309, 478 6,318, 047 6, 327,130 6, 336,758 Balance 370,000 370,000 370,000 370,000 370,000 370,000 377,194 377, 626 378,084 378,569 379,083 379, 628 7,194 7,626 8,084 8,569 9,083 9, 628 3 4 38 39 40 370,000 370,000 370,000 432,132 435,860 439, 813 62,132 65, 860 69,813 7,264,327 7,330,187 7,400,000 Required 1. What is the face amount of the bonds? 2. What is the initial selling price of the bonds? 3. What is the term to maturity in years? 4. Interest is determined by what approach? 5. What is the stated annual interest rate? 6. What is the effective annual interest rate? 7. What is the total cash interest paid over the term to maturity? 8. What is the total effective interest expense recorded over the term to maturity?

Explanation / Answer

1. Face amount of bonds = 7400000

2. Initial selling price = 6286574

3. Term of maturity = 40/2 = 20 years

4. interest is determine in effective interest method approach

5. Stated annual interest rate = 370000*100/7400000 = 5%*2=10%

6. Effective annual interest rate = 377194*100/6286574 = 6%*2=12%

7. Total cash interest paid over the term of maturity = 370000*40 = 14800000

8. Total effective interest expenses = (7400000-6286574)=1113426+14800000 = 15913426

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