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.

(A) Not sure, but probably proceeds would be higher than $1,000,000.  You
    are offering 11% interest at a time when market rates are lower.  Thus,
    people would be willing to pay more for your bonds (buy at a premium.)

(B) Cash                        $ 1,080,000
        Bonds Payable                         $ 1,000,000
        Premium on Bonds Payable                   80,000

(C) Accrued Interest on Bonds (1,000,000 x 11% x 6/12) -  $ 55,000
    Amortization of Premium (80,000 / 20 years x 6/12) - (   2,000)
    --------------------------------------------------------------
    Interest Expense, September 30, 2004               -  $ 53,000
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