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 5,694,713 1 213,000 227,789 14,789 5,709,502 2 213,000 228,380 15,380 5,724,882 3 213,000 228,995 15,995 5,740,877 4 213,000 229,635 16,635 5,757,512 5 213,000 230,300 17,300 5,774,812 6 213,000 230,992 17,992 5,792,804 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 38 213,000 276,119 63,119 6,966,089 39 213,000 278,644 65,644 7,031,733 40 213,000 281,267 68,267 7,100,000 Required: 1. What is the face amount of the bonds

1. $7,100,000

2. $5,694,713

3. 20 years

4. Effective interest method

5. 6%

6. 8%

7. $8,520,000

8. $9,925,287

Explanation:

1. Based on the information given the FACE AMOUNT of the bonds will be the Ending outstanding balance of $7,100,000

Therefore the face amount of the bonds is $7,100,000

2. Based on the information given the INITIAL SELLING PRICE of the bonds will be the beginning Outstanding balance of $5,694,713

Therefore Initial Selling Price of the bonds is $5,694,713

3. Calculation to determine the term to maturity in years

Term to maturity=40 years/2 (Semi annually)

Term to maturity=20 years

Therefore the term to maturity in years is 40 years

4. Interest is determined by EFFECTIVE INTEREST METHOD approach

5. Calculation to determine the stated annual interest rate

Annual interest rate=$213,000/$7,100,000*2

Annual interest rate=6%

Therefore the stated annual interest rate is 6%

6. Calculation to determine effective annual interest rate

Effective Annual interest rate=$227,789/$5,694,713*2

Effective Annual interest rate=8%

Therefore effective annual interest rate is 8%

7. Calculation to determine the total cash interest paid over the term to maturity

Total cash interest paid=$213,000*40

Total cash interest paid=$8,520,000

Therefore the total cash interest paid over the term to maturity is $8,520,000

8. Calculation to determine the total effective interest expense recorded over the term to maturity

Effective interest expense=$8,520,000+($7,100,000-$5,694,713)

Effective interest expense=$8,520,000+$1,405,287

Effective interest expense=$9,925,287

Therefore the total effective interest expense recorded over the term to maturity is $9,925,287

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