Bonds payable—record issuance and discount amortization Coley Co. issued 515 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. Required:
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 your answer to part a, assume that the proceeds were 514,820,000. Use the horizontal model (or write 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 5180,000 is amortized on a straight-line basis.

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 your answer to part a, assume that the proceeds were 514,820,000. Use the horizontal model (or write 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 5180,000 is amortized on a straight-line basis.

amortization of bond discount = $180,000 / 10 = $18,000 per annual coupon payment

4 months from June 1 to September 30, so discount amortization = $18,000 x 4/12 = $6,000

the journal entry to adjust accrued interest expense:

September 30, 2013, accrued interest expense:

Dr Interest expense 15,456,000

    Cr Interest payable 15,450,000

    Cr Discount on bonds payable 6,000

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