Coley co. issued $30 million face amount of 9%, 10 year bonds on June 1, 2010. T
ID: 2344658 • Letter: C
Question
Coley co. issued $30 million face amount of 9%, 10 year bonds on June 1, 2010. The bonds pay interest on an annual basis on May 31 each year.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
B. Independent of the answer to part A, assume that the proceeds were $29,640,000. Write a journal entry showing the effect of issuing the bonds.
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, 2010, assuming that the discount of $360,000 is amortized on a straight line basis.
Explanation / Answer
A. If market rates were higher, your proceeds would be lower, such that the amount of proceeds times coupon rate, reflected a market rate yield...e.g.(simplified - $30m * .09 = 2,700,000 interest annually...to get this to be a 10% equivalent yield you have..2,700,000 / 0.10 = $27m sale price of $30m face value of bonds - i.e. bonds are sold at a discount, such that the coupon rate = market rate) C. Caution here...bonds ISSUED 6/1, fiscal year ends 9/30..so you are accounting for four months of amortization of the discount, out of a total of 10yrs * 12months = 120 months of amortization