Question

Bond Premium, Entries for Bonds Payable Transactions

Campbell Inc. produces and sells outdoor equipment. On July 1, Year 1, Campbell issued $22,900,000 of 10-year, 10% bonds at a market (effective) interest rate of 9%, receiving cash of $24,389,347. 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.

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. 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?

5. Compute the price of $24,389,347 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					24,389,347
		Premium on bonds payable						1,489,347
		Bonds payable						22,900,000
2)	31-Dec	interest expense					1070533
		Premium on bonds payable			(1,489,347/20)		74467
		Cash		(22,900,000*5%)				1145000
	30-Jun	interest expense					1070533
		Premium on bonds payable					74467
		Cash						1145000
3)		total interest expense for year 1
						1070533
4)		yes
5)		n =	4.50%
		t =	20
		for principal use PV of $1 at 4.5% for 20 years
		for interest use PV of ordinary annuity at 4.5% for 20 years
		principal			=
		22,900,000	*	0.41464		9495256
		interest paid
		1145000	*	13.00794	=	14894091
		bonds issue price				24,389,347