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 | $ | 67,221 | |||||||||||
| End of Year 1 | $ | 2,442 | $ | 2,151 | $ | 291 | 66,930 | ||||||
| End of Year 2 | ? | ? | ? | 66,630 | |||||||||
| End of Year 3 | ? | ? | 310 | ? | |||||||||
| End of Year 4 | ? | 2,122 | ? | 66,000 | |||||||||
Required:
1. Complete the amortization schedule.
1.
Annual market interest rate at time of issuance: $2,151 ÷ $67,221 = 3%
Coupon rate: $2,442 / $66,000 = 3.70%
Interest: 3% × Previous balance
Cash payment: 3.70% × $66,000
Amortization: Cash payment – Interest
Balance: Previous balance – Amortization
2.
Principal amount: $66,000 from last column at end of the last year.
3. How much cash was received on the day the bonds were issued (sold)?
3.
Cash received: $67,221 from last column at January 1, Year 1.
4. Were the bonds issued at a premium or a discount? If so, what was the amount of the premium or discount?
4.
Premium: $67,221 – $66,000 = $1,221.
5. How much cash will be disbursed for interest each period and in total over the life of the bonds?
5.
Cash disbursed for interest each period: $2,442
Total cash distributed over life of bonds: $2,442 × 4 = $9,768.
6. What is the coupon rate?
6.
Coupon rate: $2,442 ÷ $66,000 = 3.70%.
7. What was the annual market rate of interest on the date the bonds were issued?
7.
Annual market rate of interest: $2,151 ÷ 67,221 = 3.2%
8. What amount of interest expense will be reported on the income statement for Year 2 and Year 3?
8.
From amortization table:
Year 2: $2,142 ($66,930 × .032)
Year 3: $2,132 ($66,630 × .032)
9. What amount will be reported on the balance sheet at the end of Year 2 and Year 3?
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