Answer:
a. Assume that the market interest rates were slightly higher than 9% when the bonds were sold. Would the proceeds from the bond issue have been more than, less than, or equal to the face amount? Explain.
- If the market interest is higher than the coupon interest, then the bonds will sell at a discount. This means that the amount of cash received will be less than the $515 million face value
b. Independent of your answer to part a, assume that the proceeds were 514,820,000. Use the horizontal model (or write the journal entry) to show the effect of issuing the bonds.
- Dr Cash 514,820,000
- Dr Discount on bonds payable 180,000
- Cr Bonds payable 515,000,000
c. Calculate the interest expense that Coley Co. will show with respect to these bonds in its income statement for the fiscal year ended September 30, 2013, assuming that the discount of 5180,000 is amortized on a straight-line basis.
amortization of bond discount = $180,000 / 10 = $18,000 per annual coupon payment
4 months from June 1 to September 30, so discount amortization = $18,000 x 4/12 = $6,000
the journal entry to adjust accrued interest expense:
September 30, 2013, accrued interest expense:
Dr Interest expense 15,456,000
Cr Interest payable 15,450,000
Cr Discount on bonds payable 6,000