Question

Campbell Inc. produces and sells outdoor equipment. On July 1, Year 1, Campbell issued $73,900,000 of 10-year, 14% bonds at a market (effective) interest rate of 13%, receiving cash of $77,971,572. 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.

	Cash
	Premium on Bonds Payable
	Bonds Payable

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 $77,971,572 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

	Date	Accounting titles & Explanations					Debit	Credit
1)	1-Jul	Cash					77,971,572
		Premium on bonds payable						4,071,572
		Bonds payable						73,900,000
2)	31-Dec	interest expense					4969421
		Premium on bonds payable			(4071572/20)		203579
		Cash		(73,900,000*14%*1/2)				5173000
	30-Jun	interest expense					4969421
		Premium on bonds payable					203579
		Cash						5173000
3)		total interest expense for year 1
						4969421
4)		yes
5)		n =	7%
		t =	20
		for principal use PV of $1 at6. 5% for 20 years
		for interest use PV of ordinary annuity at 6.5% for 20 years
		principal
		73,900,000*.283797				20972598
		interest paid
		5,173,000*11.0185				56998701
		bonds issue price				77,971,299
		(there is slight difference therefore I recommend to use the discount
		factors as provided in your question )