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Determining the Bonds Payable

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Kaye Co. issue $1 million face amount of 11% 20-year bonds in 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.

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This solution provides concise responses showing the calculations required, along with a narrative for further explanation. This is all completed in under 100 words.

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(A) Interest rates have an inverse relationship to price. So rates go down = higher price. But proceeds would be higher than $1,000,000. You are offering 11% interest at a time when ...

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