Alexi Co. issued $3.90 million face amount of 5%, 10-year bonds on June 1, 2016.

Question

Alexi Co. issued $3.90 million face amount of 5%, 10-year bonds on June 1, 2016. The bonds pay interest on an annual basis on May 31 each year.

a. Assume that the market interest rates were slightly higher than 5% when the bonds were sold. Would the proceeds from the bond issue have been more than, less than, or equal to the face amount?

b-1. Independent of your answer to part a, assume that the proceeds were $3,547,000. Use the horizontal model to show the effect of issuing the bonds. (Use amounts with + for increases and amounts with – for decreases.)

b-2. Independent of your answer to part a, assume that the proceeds were $3,547,000. Record the journal entry to show the effect of issuing the bonds. (Enter your answer in whole dollar, not in millions. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

c. Calculate the interest expense that Alexi Co. will show with respect to these bonds in its income statement for the fiscal year ended September 30, 2016, assuming that the discount of $353,000 is amortized on a straight-line basis.

Explanation / Answer

a) The proceeds from the bond issue will be less than the face amount. This is because the bond's cash flows would be discounted at the market interest rates which are higher than the coupon rates. b-1) ASSETS = LIABIITIES & STOCKHOLDERS' EQUITY INCOME STATEMENT Cash + Other assets = Liabilities + Stockholders' Equity Revenues - Expenses = Net Income 3547000 + 0 = +3900000 + 0 0 - 0 = 0 Bonds payable -353000 Discount on Bonds payable b-2) Cash 3547000 Discount on bonds payable 353000 Bonds payable 3900000 c) 4 months interest accrued (from June 1 to September 30) = 3900000*5%*4/12 = 65000 Amortization of discount = (353000/10)*4/12 = 11767 Interest expense to be shown in the income statement for the year ended September 30, 2016. 76767

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