Question

Campbell Inc. produces and sells outdoor equipment. On July 1, Year 1, Campbell Inc. issued $60,400,000 of 10-year, 12% bonds at a market (effective) interest rate of 11%, receiving cash of $64,009,069. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Required:

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.) 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.)
3.	Determine the total interest expense for Year 1.
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?
5.	Compute the price of $64,009,069 received for the bonds by using the tables shown in Present Value Tables. (Round to the nearest dollar.) *Refer to the Chart of Accounts for exact wording of account titles.

Answer 1

Solution 1:

Journal Entries - Campbell Inc.
Date	Particulars	Debit	Credit
July 1, Year 1	Cash Dr	$64,009,069.00
	To Bond Payable		$60,400,000.00
	To Premium on bond payable		$3,609,069.00
	(To record issue of bonds)

Solution 2a:

Journal Entries - Campbell Inc.
Date	Particulars	Debit	Credit
Dec 31, Year 1	Interest expense Dr	$3,443,547.00
	Premium on bond payable Dr ($3,609,069/20)	$180,453.00
	To Cash ($60,400,000*12%*6/12)		$3,624,000.00
	(To record semiannual interest payment and premium amortization)

Solution 2b:

Journal Entries - Campbell Inc.
Date	Particulars	Debit	Credit
Jun 30, Year 2	Interest expense Dr	$3,443,547.00
	Premium on bond payable Dr ($3,609,069/20)	$180,453.00
	To Cash ($60,400,000*12%*6/12)		$3,624,000.00
	(To record semiannual interest payment and premium amortization)

Solution 3:

Total interest expense for year 1 = $3,443,547 + $3,443,547 = $6,887,094

Solution 4:

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

Solution 5:

Computation of bond price
Table values are based on:
n=	20
i=	5.50%
Cash flow	Table Value	Amount	Present Value
Present value of face amount	0.34273	$60,400,000.00	$20,700,892
Present value of semiannual interest	11.95038	$3,624,000.00	$43,308,177
Price received for the bonds			$64,009,069