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

1. Complete the amortization schedule. (Enter all your values in positive. Round your final answers to nearest whole dollar amount.)

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

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

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

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

6. 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).)

7. What was the annual market rate of interest on the date the bonds were issued? (Enter your answer as a percentage rounded to 1 decimal place (i.e. 0.123 should be entered as 12.3).)

8. 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.)

Answer 1

1	Cash column= Face value of the bond*coupon rate
	It will be same for the all 4 years
	Then cash column will be $ 2162
	Move to end of year 2
	Balance=46433
	Then amortization=Previous balance-Current balance=46636-46433=$ 203
	Interest=Cash-Amortization=2162-203=$ 1959
	Move to end of year 3
	Amortization=$ 212
	Balance=Previous balance-Amortization=46433-212=$ 46221
	Interest=Cash-Amortization=2162-212=$ 1950
	Move to end of year 4
	Amortization=Cash-interest=2162-1941=$ 221
	Amortization schedule:
	Date	Cash	Interest	Amortization	Balance
	Jan 1,Year 1				46831
	End of year 1	2162	1967	195	46636
	End of year 2	2162	1959	203	46433
	End of year 3	2162	1950	212	46221
	End of year 4	2162	1941	221	46000
2	Amount of principal will Olive pay investors=Balance at the end of year 4=$ 46000
3	Cash received on the day the bonds were issued=Balance at Jan 1,Year 1=$ 46831
4	Face value of the bond=Balance at the end of year 4=$ 46000
	Issue price > Face value.
	Hence, bonds are issued at premium
	Premium on issue of bonds=Issue price-Face value=46831-46000=$ 831
5	Cash disbursed for Interest for each period:
	Year	$
	End of year 1	2162
	End of year 2	2162
	End of year 3	2162
	End of year 4	2162
	Total	8648
6	Coupon rate=Cash/Face value=2162/46000=0.047=4.7%
7	Annual market rate of interest=Interest for year 1/Issue price=1967/46831=0.0420=4.2%
8	Interest expense:
	Year	$
	End of year 2	1959
	End of year 3	1950