Question

1. Bond Premium, Entries for Bonds Payable Transactions, Interest Method of Amortizing Bond Premium.

   Campbell, Inc. produces and sells outdoor equipment. On July 1, Year 1, Campbell issued $56,000,000 of 20-year, 14% bonds at a market (effective) interest rate of 12%, receiving cash of $64,412,320. 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 or enter "0".

   1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds.

   Year 1 July 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 interest method. (If required, round your answers to the nearest dollar.)

   Year 1 Dec. 31

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

   Year 2 June 30

   3. Determine the total interest expense for Year 1.
   $

Check My Work

Answer 1

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

Year	Particulars	L.F	Debit ($)	Credit ($)
Jul-01	Cash		64,412,320
	Unamortized Bond Premium			8,412,320
	Bond payable			56,000,000
	(for bond issued for 10 years)

2. a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond premium, using the interest method.

Year	Particulars	L.F	Debit ($)	Credit ($)
Jun-30	Interest expense		3,499,384
	Unamortized Bond Premium (8,412,320/20)		420,616
	Cash (56,000,000*14%*6/12)			3,920,000
	(For interest paid on 14% bonds and amortization of premium for half year)

2. B. Interest payment on June 30, Year 2, and the amortization of the bond premium, using the straight-line method will be recorded as shown below:

Year	Particulars	L.F	Debit ($)	Credit ($)
Jun-30	Interest expense		3,499,384
	Unamortized Bond Premium (8,412,320/20)		420,616
	Cash (56,000,000*14%*6/12)			3,920,000
	(For interest paid on 14% bonds and amortization of premium for half year)

3. Total interest expense for Year 1 will be:

Interest Paid (56,000,000*12%*6/12) = 3,920,000

Less: Amortized Premium (8,412,320/20) = 420,616

Interest Expense $3,499,384

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