Question

Bond Premium, Entries for Bonds Payable Transactions

Campbell Inc. produces and sells outdoor equipment. On July 1, Year 1, Campbell issued $84,600,000 of 10-year, 13% bonds at a market (effective) interest rate of 12%, receiving cash of $89,451,370. 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.

Learning Objective 2.

1. 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.

2. Determine the total interest expense for Year 1. Round to the nearest dollar.
$

3. 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

4. Compute the price of $89,451,370 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

Answer 1.

Face Value = $84,600,000
Proceed from Issue = $89,451,370

Premium on Bonds = Proceed from Issue - Face Value
Premium on Bonds = $89,451,370 - $84,600,000
Premium on Bonds = $4,851,370

Annual Coupon Rate = 13%
Semiannual Coupon Rate = 6.50%
Semiannual Coupon = 6.50%*$84,600,000
Semiannual Coupon = $5,499,000

Time to Maturity = 10 years
Semiannual Period to Maturity = 20

Semiannual Amortization of Premium = Premium on Bonds / Semiannual Period to Maturity
Semiannual Amortization of Premium = $4,851,370 / 20
Semiannual Amortization of Premium = $242,569

Semiannual Interest Expense = Semiannual Coupon - Semiannual Amortization of Premium
Semiannual Interest Expense = $5,499,000 - $242,569
Semiannual Interest Expense = $5,256,431

Answer 2.

Total Interest Expense for Year 1 = $5,256,431

Answer 3.

Yes, 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 4.