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 $ 30,532 End of Year 1 $ 1,650 $ 1,527 $ 123 30,409 End of Year 2 ? ? ? 30,279 End of Year 3 ? ? 136 ? End of Year 4 ? 1,507 ? 30,000

Answer 1

Answer and Explanation:

The amortization table is shown below:-

Date Cash Interest Amortization Balance

January 1, Year 1 $30,532

End of Year 1 $1650 $1,527 $123 $30,409

End of Year 2 (Note 1) $1,650 $1,520 $130 $30,279

End of Year 3 (Note 2) $1,650 $1,514 $136 $30,143

End of Year 4 (Note 3) $1,650 $1,507 $143 $30,000

Calculation of Interest Rate = Interest ÷ Principal outstanding

= $1,527 ÷ $30,532

= 5%

Installment is equal for all years, hence the cash will also be the same for all the year $1,650.

Note 1.

Interest for year 2 = $30,409 × 5%

= $1,520

Amortization = Cash - Interest = $1,650 - $1,520

= $130

Note 2

Interest = Cash - Amortization

= $1,650 - $136

= $1,514

Balance = $30,279 - $136

= $30,143

Note 3

Amortization = Cash - Interest

= $1,650 - $1,507

= $143