Coley Co. issued $15 million face amount of 9%, 10-year bonds on June 1, 2013. T
ID: 2382320 • Letter: C
Question
Coley Co. issued $15 million face amount of 9%, 10-year bonds on June 1, 2013. The bonds pay interest on an annual basis on May 31 each year.
A. assume that the proceeds were $14,820,000. Use the horizontal model to show the effect of issuing the bonds. (Enter decreases to account balances with a minus sign.)
B. assume that the proceeds were $14,820,000. Record the journal entry to show 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, 2013, assuming that the discount of $180,000 is amortized on a straight-line basis.
Explanation / Answer
C)
The company has to accrue interest in two ways: accrual of interest payable and amortization of discount.
For the first, the company's annual interest expense is $1,350,000 (15,000,000 * 9%). There are 120 days between June 1 and Sept 30 (assuming a 30/360 day count). So the accrual for the period June 1-Sept. 30 is 120/360*1,350,000,or $450,000.
The $180,000 discount is amortized on a straight line basis over ten years, or $18,000/year. The accrual for the period June 1-Sept 30 is 120/360*18,000 or 6,000.
So the total interest expense is 450,000 + 6,000 = $456,000.