Interest is payable annually on January 1. (This is the same bond as E14-6, except use effective interest method.)
1/1/2014
Cash
1,855,816
At Issue
Discount on Bonds
144,184
Bonds Payable
2,000,000
12/31/2014 AJE
Interest Expense (NCV x mkt rate x time)
222,698
Discount on Bonds
22,698
Interest Payable (FV x std rate x time)
200,000
1/1/2015
Interest Payable
200,000
(All Interest Pmt Dates)
Cash
200,000
12/31/2015 AJE
Interest Expense (NCV x mkt rate x time)
225,422
Discount on Bonds
25,422
Interest Payable (FV x std rate x time)
200,000
1/1/2016
Interest Payable
200,000
(All Interest Pmt Dates)
Cash
200,000
(I used an on-line calculator to compute the rate, since I do not have a calculator that does time value of money calculations. The one I
used is at:
Using the financial calculator version 4.2, set interest payment at the end of
the period
. Enter n=5; PV=1,855,816; Pmt=(200,000); FV=(2,000,000). (Note: The pmt and FV values have to be entered as negative
numbers.) Leave the interest rate field blank and press the “IR” key to calculate the rate above.) The effective market rate was ~ 12%.
If you did not calculate this on a calculator that has time value of money function, then the you can calculate the effective-interest or
yield rate is 12% through a trial and error process using Table 6-2 for the discounted value of the principal ($1,134,860) and Table 6-4
for the discounted value of the interest ($720,956); for a total present value of $1,855,816.
(A financial calculator may be used to determine
the rate of 12%.)
Present Value
of the:
Face Value:
= Face Value
x
PV of $1 factor
(i= 12%, n=5)
$2,000,000
x
0.56743
=
$1,134,860
Interest Payments
= Interest Payment
x
PV of ordinary annuity factor (i=12%, n=5)
= (FV x stated rate x time)
x
PV of ordinary annuity factor (i=12%, n=5)
= ($2,000,000 x 10%/12 mo x 12 mo.)
x
3.60478
$200,000
x
3.60478
=
720,956
Cash Proceeds from the Sale of the Bond
$1,855,816
Interest Expense over Life of Bond = Interest Payments + Discount
= total # of payments made x interest payment + discount at issue
= # of payments made x (FV
x
std rate
x
time)
+
discount at issue
= {5 annual payments x ($2,000,000 x 10%/12 mo. x 12 mo.)} + $144,184
= (5 annual payments x $200,000) + $144,184
= $1,000,000 + $144,184 = $1,144,184

ACCO 4020: Chapter 14 homework solutions (15
th
edition)
EXERCISE 14-7 (15
th
edition) – continued:
(part f)
Amortization Table - Effective-Interest Method (12%)
Year
Cash Paid
(=FV x std rate x time)
(=$2,000,000 x 10%/12 mo. x 12 mo.)
Interest Expense
(=NCV x mkt rate x time)
(=NCV x 12%/12 mo. x 12 mo.)
Discount
Amortized
Carrying Value
of Bonds
(NCV)
Jan. 1, 2014
$1,855,816.00
Dec. 31, 2014
$200,000
$222,697.92
$22,697.92
1,878,513.92
Dec. 31, 2015
200,000
225,421.67
25,421.67
1,903,935.59
Dec. 31, 2016
200,000
228,472.27
28,472.27
1,932,407.86
Dec. 31, 2017
200,000
231,888.94
31,888.94
1,964,296.80
Dec. 31, 2018
200,000
235,703.20
35,703.20
2,000,000.00
totals
$1,000,000
$1,144,184
$144,184
(part g) Entry for early retirement of bond on 1/1/2016:
1/1/2016
Bond Payable
2,000,000
At early
Loss on Retirement
136,064
retirement
Discount on Bond Payable
96,064
Cash (102% x $2,000,000 face)
2,040,000

ACCO 4020: Chapter 14 homework solutions (15
th
edition)
EXERCISE 14-9 (15
th
edition)
Facts: On June 30, 2014, Mischa Auer Co. issued $4,000,000 face value, 13%, 20-year bonds at $4,300,920, a yield of
12%. The company uses the effective interest method to amortize the bond premium or discount. The bonds pay interest
semiannually on June 30 and December 31.

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