In 2013,Karaoke Tunes issued $200,000 of bonds for $190,200.If the stated rate of interest was 6.5% and the market rate of interest was 7.1%,how would the company calculate the discount at the time the bonds were issued using the effective interest method?

Question

Quizplus · Accepted Answer

The discount can be calculated by finding the difference between the face value of the bonds and the price they were sold for. Therefore, the discount would be equal to:

$200,000 - $190,200 = $9,800

To calculate the discount using the effective interest method, we need to determine the present value of the future cash flows associated with the bond. This requires us to use the market rate of interest (7.1%) rather than the stated rate of interest (6.5%).

Using the present value formula, we can determine that the present value of the bond is:

PV = FV / (1 + i)n

PV = $200,000 / (1 + 0.071)^1
PV = $186,702.34

Therefore, the discount that was recognized at the time of issuance would be:

$190,200 - $186,702.34 = $3,497.66

So, the best choice is A because it shows how the effective interest method is used to calculate the discount, which is based on the market rate of interest.

In 2013,Karaoke Tunes Issued $200,000 of Bonds for $190,200