Solutions:

The initial carrying amount of the bond is determined as follows:

Issue price 900
Transaction costs (50)
Initial measurement 850

The effective interest rate is determined using the “trial and error approach” with interpolation when necessary.
Future cash flows x PF @X% n = Present value (initial carrying amount)
Where: X% = effective interest rate

First trial: @10%

 (1,100 x PV of 1 @10%, n=5) + (40 x PV ordinary annuity of 1 @10%, n=5) = 850
 (1,100 x 0.620921) + (40 x 3.790787) = 850
 683 + 152 = 835 is not equal to 850

Second trial: @9% (we need a higher amount so we’ll decrease the rate)
 (1,100 x PV of 1 @9%, n=5) + (40 x PV ordinary annuity of 1 @9%, n=5) = 850
 (1,100 x 0.649931) + (40 x 3.889651) = 850
 715 + 156 = 871 is not equal to 850
 
From the above computations, we can infer that the effective interest rate is a rate between 9% and 10%. We’ll
perform interpolation next.
x% - 9%
10
% - 9%

850 - 871
=
835 - 871 0.58

Effective interest rate (x%) = 9% + .58% = 9.58%

The amortization table using 9.58% as the effective interest is prepared as follows:
Date Payments Int. expense Amortization Present value
1/1/x0         850
12/31/
x0           40           81           41         891
12/31/
x1           40           85           45         937
12/31/
x2           40           90           50         987
12/31/
x3           40           95           55     1,041
12/31/
x4           40         100           60     1,101

1. A
Analysis: The entity has transferred to the bank substantially all of the risks and rewards of ownership of the
receivables. Accordingly, it removes the receivables from its statement of financial position (i.e., derecognizes
them), and it shows no liability in respect of the proceeds received from the bank.