Business College

Bonds payable-record issuance and premium amortization. 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.

Answers

Answer 1

Answer:

Cash proceeds would be higher than face amount.

Bond issuance:

Dr cash                                                          $1,080,000

Cr bonds payable                                                                    $1,000,000

Cr premium on bonds payable($1,080,000-$1,000,000)        $80,000

$57,400

Explanation:

If the market interest rate were slightly lower than 11% coupon rate,the cash proceeds from the bonds would be higher than face amount as a lower market rate is used as a discount rate in calculating the present value,in other words,the lower the discount rate,the higher the present value as further shown below.

Assume market rate is 10.5%

cash proceeds=-pv(rate,nper,pmt,fv)

rate is 10.5%

nper is 20 years

pmt =$1,000,000*11%=$110,000

fv is $1000,000

=-pv(10.5%,20,110000,1000000)=$1,041,154.54  

amortization(annually)=$80,000/20=$4000

Amortization for six months=$4,000*6/12=$2,000

coupon=$1,080,000*11%*6/12=$ 59,400.00  

Interest expense=coupon -premium amortization=$ 59,400.00-$2,000.00=$57,400

Related Questions

Every organization needs some degree of flexibility and standardization. True False Being overly committed to following rules can harm an organization and keep it from growing. True False Every organization needs either a degree of ________ to adapt to new situations or some degree of ________ to make routine tasks and decisions as efficient and effective as possible. standardization; flexibility culture; vision flexibility; standardization structure; design

Answers

Answer:

1. True: Every organization needs some degree of flexibility and standardization.

2. True: Being overly committed to following rules can harm an organization and keep it from growing.

3. flexibility; standardization.

Explanation:

It is really important and necessary that all organization have some degree of flexibility and standardization. Every organization is expected to be flexible, in order to be able to effectively manage potential changes or challenges that arises in business. They should also be standardized, by having proper policies, strategies and structure for the purpose of running the business smoothly and efficiently.

However, if an organization is overly committed to following rules, this can cause harm to it's business operations and thereby hindering its growth and development.

Hence, some degree of flexibility is needed in every organization in order to adapt to new situations or some degree of standardization to make routine tasks and decisions as efficient and effective as possible.

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