Question

Bond Premium, Entries for Bonds Payable Transactions

Campbell Inc. produces and sells outdoor equipment. On July 1, Year 1, Campbell issued $46,900,000 of 10-year, 13% bonds at a market (effective) interest rate of 11%, receiving cash of $52,504,770. 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

Feedback

Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account.

The straight-line method of amortization provides equal amounts of amortization over the life of the bond.

Learning Objective 2.

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

Feedback

Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account.

The straight-line method of amortization provides equal amounts of amortization over the life of the bond.

Learning Objective 2.

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 $52,504,770 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	$

General Ledger too!!!!

Answer 1

Formula sheet

A	B	C	D	E	F	G	H
2		Face Value of the Bond	46900000
3		Bonds issued at	52504770
4		Coupon (Semi-annual)	0.13
5		Semi-annual coupon payment	=D2*D4/2
6		Period (years)	10
7		Effective interest rate	0.11
8		PV of bond	=-PV(D7/2,D6*2,D5,D2)
9
10		1)
11
12		Journal entry to record bond issue:
13		Date	Journal Entry	Debit	Credit
14		7/1/20X1	Cash	=D3
15			Bonds Payable		=D2
16			Premium of Bonds Payable		=E14-F15
17
18		2)
19
20		Straight Line Amortization:
21		In Straight Line Amortization, same amount of amortization is done each period.
22		Given the following data:
23		Premium on Bond Payable	=F16
24		Total number of semiannual period	=D6*2
25		Amortization per semiannual period	=Premium on Bond Payable / Total number of periods
26			=D23/D24
27
28		Amortization Table
29		Year	Coupon Payment (@6.5% of face value)	Interest Expense	Amortization of Bond premium	BV of Bond
30		7/1/20X1				=D3
31		12/31/20X1	=$D$5	=D31-F31	=D26	=G30-F31
32		6/30/20X2	=$D$5	=D32-F32	=D26	=G31-F32
33
34		Journal Entry:
35		Date	Journal Entry	Debit	Credit
36
37		12/31/20X1	Interest Expense	=E31
38			Premium of Bonds Payable	=F31
39			Cash		=E37+E38
40
41		6/30/20X2	Interest Expense	=E32
42			Premium of Bonds Payable	=F32
43			Cash		=E41+E42
44
45		3)
46
47		Total interest expense in Year 1	=E31
48
49		4)
50		Bond proceed is the present value of future cash flows and lower the interest rate higher will be the present value.
51		Therefore, Bond proceed will always be greater than the face value when the contract rate is higher than the market interest rate.
52
53		5)
54		Present value of the face amount	=$46,900,000*(P/F,5.5%,20)
55			=D2*(1/((1+D7/2)^(D6*2)))	=D2*(1/((1+D7/2)^(D6*2)))
56
57		Present value of the semi-annual interest payments	=$3,048,500*(P/A,5.5%,20)
58			=D5*PV(D7/2,D6*2,-1,0)	=D5*PV(D7/2,D6*2,-1,0)
59
60		Price received for the bonds	=D55+D58	=D55+D58
61