Coley Co. issued $30 million face amount of 9%, 10-year bonds on June
1, 2009. The bonds pay interest on an annual basis on May 31, each year.
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 $26,640,000. Use the horizontal model to show the effect of issuing the bonds.
c.) Calculate the interest expense that Coley Co. will show with the respect to these bonds in its income statement for the fiscal year ended September 30, 2009, assuming that the discount rate of $360,000 is amortized on a straight-line basis.
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