Check my On January 1 2018 Tennessee Harvester Corporation i

Check my On January 1, 2018, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June3 December 31. Portions of the bo amortization schedule appear below Cash Effective Increase in Outstanding Payment Payment Interest Balance Balance 7,841,478 348,eee 352,074 12,e74 7,053,552 340,000 352,678 12,678 7,66,238 340,eee 353,311 13,311 7,079,541 348,e88 353,977 13,977 7,093,518 676 7,108,194 6 348,eee 355,410 15,410 7,123,604 4. 340,e80 354,67614, Ay 38 39 40 348,880 413,426 73,426 8,341,95e 348,e80 417,098 77,8988,419,848 348,088 420,952 80,9528,5ee,eee

Solution

1. Face Amount of the bonds = $8,500,000

2. Initial Selling price of the bonds = Initial Outstanding balance = $7,041,478

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

4. Interest here has been determined by effective interest rate approach since the effective interest is increasing each period.

5. Annual Interest Rate = Interest in $ / Face Value of the bonds

= (340,000/ 8,500,000)*100 *2

= 4% *2= 8%

Since it is for half year , 4% has been multipied by 2

Therefore annual interest rate = 4% *2 = 8%

6. Effective Interest Rate = (Effective Interest /Initial Outstanding Balance) *100 *2

= (352, 074/7,041,478)*100*2

= 10%

7. Total Cash interest = Interest * No of periods

= $340,000* 40

= 13,600,000

8. Discount on issue of Bonds = 8,500,000 - 7,041,478 = 1,458,522

Total effective expense recorded over the term to maturity = Discount on issue of bonds + Total cash interest

= 1,458,522 +13,600,000

= 15,058,522