Question

Bond Premium, Entries for Bonds Payable Transactions

Campbell Inc. produces and sells outdoor equipment. On July 1, Year 1, Campbell issued $18,400,000 of 10-year, 11% bonds at a market (effective) interest rate of 10%, receiving cash of $19,546,533. 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 $19,546,533 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 6.Redemption of Bonds Payable A $500,000 bond issue on which there is an unamortized premium of $67,000 is redeemed for $490,000. Journalize the redemption of the bonds. If an amount box does not require an entry, leave it blank.	$

Answer 1

Solution 1:

Journal Entries - Campbell Inc.
Date	Particulars	Debit	Credit
July 1, Year 1	Cash Dr	$19,546,533.00
	To Bonds Payable		$18,400,000.00
	To Premium on Bonds Payable		$1,146,533.00
	(being bond issued at premium)

Solution 2a & 2b:

Journal Entries - Campbell Inc.
Date	Particulars	Debit	Credit
Dec 31, Year 1	Interest Expense Dr	$54,794.00
	Premium on bond payable Dr ($1,146,533/ 20)	$57,326.65
	To Cash ($18,400,000 *11%*6/12)		$1,012,000.00
	(Being Semi Annual interest paid on bonds)
June 30, year 2	Interest Expense Dr	$54,794.00
	Premium on bond payable Dr ($1,146,533/ 20)	$57,326.65
	To Cash ($18,400,000 *11%*6/12)		$1,012,000.00
	(Being Semi annual interest paid on bonds)

Solution 3:

From above answer in 2a part, Total interest Expense for Year 1 = $54,794

Solution 4:

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

Solution 5:

Face value = $18,400,000

Market interest rate = 10%, 5% semi annual

Maturity = 10 years, 20 half years

Present value of the face amount = $18,400,000 *PV factor @ 5% for 20th period = $69,34,766

Present value of the semi-annual interest payments = ($18,400,000*11%*1/2) * Cumulative PV Factor @5% for 20 periods = $12,611,757 Total Price received for the bond = $ 69,34,766 +  $12,611,757 = $19,546,523 Solution 6: Event Particulars Debit Credit 1 Bonds Payable Dr $500,000.00 Premium on bond payable Dr $67,000.00        To Cash $490,000.00        To Profit on redemption of bonds $77,000.00 (To record the redemption of bond payable)