[The following information applies to the questions displayed below.) On January

Question

[The following information applies to the questions displayed below.) 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 Amortization S 220 248 Cash Balance 56,966 56,746 56,512 Interest January 1, Year 1 End of Year 1 End of Year 2 End of Year 3 End of Year 4 $ 3,752 $ 3,532 3.488 56,000

Explanation / Answer

1 Date Cash Interest Amortization Balance Jan 1 year 1 56966 End of year 1 3752 3532 220 56746 End of year 2 3752 3518 234 56512 End of year 3 3752 3504 248 56264 End of year 4 3752 3488 264 56000 2 Principal amount = 56000 3 Cash received = 56966 4 Premium $966 5 Cash disbured per period 3752 Cash disbured in total 15008 6 Coupon rate = 3752/56000= 6.7% 7 Market rate = 3532/56966= 6.2% 8 Interest expense Year 2 3518 year 3 3504 9 Bonds payable Year 2 56512 year 3 56264

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