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    Bonds payable?record issuance and premium amortization

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    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.

    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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    Solution Summary

    The solution uses the horizontal model to show the effect of issuing the bonds and calculates interest expenses.