Question

Bond Premium, Entries for Bonds Payable Transactions

Campbell Inc. produces and sells outdoor equipment. On July 1, Year 1, Campbell issued $15,000,000 of 10-year, 10% bonds at a market (effective) interest rate of 8%, receiving cash of $17,038,598. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Required:

If an amount box does not require an entry, leave it blank.

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1.

2. Journalize the entries to record the following:

a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)

	Interest Expense
	Premium on Bonds Payable
	Cash

b. The interest payment on June 30, Year 2, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)

	Interest Expense
	Premium on Bonds Payable
	Cash

3. Determine the total interest expense for Year 1. Round to the nearest dollar.
$

4. Will the bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest?
Yes

5. Compute the price of $17,038,598 received for the bonds by using Exhibit 5 and Exhibit 7. (Round to the nearest dollar.) Your total may vary slightly from the price given due to rounding differences.

Present value of the face amount	$
Present value of the semi-annual interest payments	$
Price received for the bonds	$

Answer 1

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1.

Date	account and explanation	debit	credit
July 1	Cash	17038598
	Bonds payable		15000000
	Premium on bonds payable		2038598

2. Journalize the entries to record the following:

a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)

	Interest Expense	648070
	Premium on Bonds Payable (2038598/20)	101930
	Cash (15000000*10%*6/12)		750000

b. The interest payment on June 30, Year 2, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)

	Interest Expense	648070
	Premium on Bonds Payable	101930
	Cash		750000

3) Total interest expense = $648070

4) Yes

5) Net present value

Present value of the face amount (15000000*0.45639)	$6845850
Present value of the semi-annual interest payments (13.59033*750000)	$10192748
Price received for the bonds	$17038598