I'm trying to prepare for an upcoming accounting test.  Below is one
of the problems I've been having difficult with:

Bonds payable-record issuance and premium amortization.  Kaye
Co. issued $1 million face amount of 11% 20-year bonds on April 1,
2004.  The bonds pay interest on an annual basis on March 31 each
year.

Required:

  a.  Assume that market interest rates were slightly lower than 11%
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.

  b.  Independent of your answer to part a, assume that the proceeds
were $1,080,000.  Use the horizontal model (or write the journal
entry) to show the effect of issuing the bonds.
  
  c.  Calculate the interest expense that Kaye Co. will show with
respect to these bonds in its income statement for the fiscal year
ended September 30, 2004, assuming that the premium of $80,000 is
amortized on a straight-line basis.

"When the market interest rate is less than the coupon rate, the
market price will be greater than par."  (Page 392)  Therefore, the
proceeds will be greater than the face amount.

At the time of issue, the journal entry is:

4/1/2004 Cash......................................  $1,080,000
		Debenture Bonds Payable............		     $1,080,000

9/30/2004 Interest Expense.............................	$53,000
	   Debenture Bonds Payable.....................	$2,000
		Interest Payable.......................			$55,000
	   To recognize interest expense for six months.

Since the premium of $80,000 is amortized on a straight line basis,
the Debenture Bonds Payable amount is $2,000 for each 6 month period. 
To reflect the amortization of the premium paid by the bond purchases,
the Interest Expense is correspondingly reduced to account for the
$80,000 that will not be repaid at maturity.  Effectively, the premium
has reduced the firm's interest expense.

Sincerely,

Wonko

Source:  Financial Accounting, sixth edition, by Stickney, Weil, and
Davidson, Harcourt Brace Jovanovich Inc. (1991)

Great Answer...!! Thank you.

"When the market interest rate is less than the coupon rate, the
market price will be greater than par."  (Page 392)  Therefore, the
proceeds will be greater than the face amount.

 
If the coupon is higher than the market interest rate and if the bond
sold at par, then buying it would be an obviously good idea. E.g. if
the coupon was 10% and the market rate was 5%, a bond of par $100
would return $10, but the same $100 invested at the market rate would
return only $5. So, the bond is worth more than $100.

Hopefully somebody is still out there on this question - I am
particularly interested in how wonko-ga arrived at his answer to this
question:
"Calculate the interest expense that Kaye Co. will show with
respect to these bonds in its income statement for the fiscal year
ended September 30, 2004, assuming that the premium of $80,000 is
amortized on a straight-line basis."
Answer: 9/30/2004 Interest Expense.............................	$53,000
	   Debenture Bonds Payable.....................	$2,000
		Interest Payable.......................			$55,000
Where did the $53,000 come from?  How did you determine this was a
debenture bonds payable from the question? What happened to the
$80,000 premium????