Question

Bond Premium, Entries for Bonds Payable Transactions

Campbell Inc. produces and sells outdoor equipment. On July 1, Year 1, Campbell issued $40,800,000 of 10-year, 13% bonds at a market (effective) interest rate of 12%, receiving cash of $43,139,668. 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?

Answer 1

Solution 1:

Journal Entries - Campbell Inc.
Date	Particulars	Debit	Credit
1-Jul	Cash Dr	$43,139,668.00
	To Bond Payable		$40,800,000.00
	To Premium on issue of bond		$2,339,668.00
	(Being bond issued at premium)

Solution 2:

Journal Entries - Campbell Inc.
Date	Particulars	Debit	Credit
31-Dec	Interest Expense Dr	$2,535,017
	Premium on issue of bond Dr ($2,339,668/20)	$116,983
	To Cash ($40,800,000*13%*6/12)		$2,652,000
	(Being interest paid and premium amortized)
30-Jun	Interest Expense Dr	$2,535,017
	Premium on issue of bond Dr ($2,339,668/20)	$116,983
	To Cash ($40,800,000*13%*6/12)		$2,652,000
	(Being interest paid and premium amortized)

Solution 3:

Total interest expense for year 1 = $2,535,017

Solution 4:

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