Question

Campbell Inc. produces and sells outdoor equipment. On July 1, Year 1, Campbell issued $25,000,000 of 10-year, 10% bonds at a market (effective) interest rate of 9%, receiving cash of $26,625,925. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Answer 1

July 1, Year1:
Cash	$       26,625,925
Premium on bonds payable		$      1,625,925
Bonds payable		$    25,000,000
[To record issue of bonds]
USING STRAIGHT LINE METHOD FOR AMORTIZATON OF PREMIUM:
31st December, Year 1:
Interest expense [1625925/20]	$ 1,168,704
Premium on bonds payable	$               81,296
Cash		$      1,250,000
[To record payment of interest]
30th June, Year 2:
Interest expense [1625925/20]	$ 1,168,704
Premium on bonds payable	$               81,296
Cash		$      1,250,000
[To record payment of interest]
USING EFFECTIVE INTEREST RATE METHOD FOR AMORTIZATION OF PREMIUM:
31st December, Year 1:
Interest expense [26625925*4.5%]	$ 1,198,167
Premium on bonds payable	$               51,833
Cash		$      1,250,000
[To record payment of interest]
30th June, Year 2:
Interest expense [(26625925-51833)*4.5%]	$ 1,195,834
Premium on bonds payable	$               54,166
Cash		$      1,250,000
[To record payment of interest]