Question

On January 1 of this year, Olive Corporation issued bonds. Interest is payable once a year on December 31. The bonds mature at the end of four years. Olive uses the effective-interest amortization method. The partially completed amortization schedule below pertains to the bonds:

Date

Cash

Interest

Amortization

Balance

January 1, Year 1

$

46,831

End of Year 1

$2,162

$

1,967

$

195

46,636

End of Year 2

?

?

?

46,433

End of Year 3

?

?

212

?

End of Year 4

?

1,941

?

46,000

a. Complete the amortization schedule Date Cash Interest Amortization Balance January 1, Year 1 $46,831 End of Year 1 $2,162 $1,967 $195 $46,636 End of Year 2 ? ? ? $46,433 End of Year 3 ? ? $212 ? End of Year 4 ? $1,941 ? $46,000

b. When the bonds mature at the end of Year 4, what amount of principal will Olive pay investors?

c. How much cash was received on the day the bonds were issued (sold)?

d. Were the bonds issued at a premium or a discount? If so, what was the amount of the premium or discount?

e. How much cash will be disbursed for interest each period and in total over the life of the bonds?

	Cash disbursed per period Cash disbursed in total

f. What is the coupon rate? (Enter your answer as a percentage rounded to 1 decimal place (i.e. 0.123 should be entered as 12.3).)

g. What was the annual market rate of interest on the date the bonds were issued? (Enter your answer as a percentage rounded to the nearest whole percent (i.e. 0.123 should be entered as 12).)

h. What amount of interest expense will be reported on the income statement for Year 2 and Year 3?(Round your final answers to nearest whole dollar amount.)

i. What amount will be reported on the balance sheet at the end of Year 2 and Year 3?

Answer 1

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Part-a
	A	B	C=A-B	D=D Previous-C
Date	Cash	Interest	Amortization	Balance
		4.2% of D Previous
January 1, Year 1				$            46,831
End of Year 1	$2,162	$                     1,967	$              195	$            46,636
End of Year 2	$2,162	$                     1,959	$              203	$            46,433
End of Year 3	$2,162	$                     1,950	$              212	$            46,221
End of Year 4	$2,162	$                     1,941	$              221	$            46,000
Part-b		$                   46,000
Part-c		$                   46,831
Part-d		Premium	$              831
		Part b-Part c
Part-e
Cash Disbursed per Period		$                     2,162
Cash Disbursed in total		2162*4	$          8,648
Part-f		2162/46000	4.70%
Part-g		1967/46831	4.20%
Part-h
Year 2		$                     1,959
Year 3		$                     1,950