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.

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1.

	Cash
	Premium on Bonds Payable
	Bonds Payable

Learning Objective 2.

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.)

	Interest Expense
	Premium on Bonds Payable
	Cash

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

Learning Objective 2.

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

5. 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

Solution 1:

Journal Entries - Campbell Inc.
Year	Date	Particulars	Debit	Credit
1	1-Jul	Cash Dr	$89,451,370.00
		To Premium on bond payable		$4,851,370.00
		To Bond payable		$84,600,000.00
		(Being bond issued at premium)

Solution 2:

Journal Entries - Campbell Inc.
Year	Date	Particulars	Debit	Credit
1	31-Dec	Interest expense Dr	$5,256,431.00
		Premium on bond payable Dr	$242,569.00
		To Cash		$5,499,000.00
		(Being interest paid and premium amortized)
2	30-Jun	Interest expense Dr	$5,256,431.00
		Premium on bond payable Dr	$242,569.00
		To Cash		$5,499,000.00
		(Being interest paid and premium amortized)

Solution 3:

Total interest expense for year 1 = $5,256,431

Solution 5:

Bond issue price = Present value of interest and principal discounted at market rate of interest i.e. 12%

Semiannual market rate of interest = 6%

Coupon rate semi annual = 6.50%

Period of maturity = 10 years, 20 semiannual period

Present value of semiannual interest payment = ($84,600,000 * 6.50%) * Cumulative PV factor at 6% for 20 periods

= $5,499,000 * 11.46992 = $63,073,090

Present value of face amount = $84,600,000 * PV factor at 6% for 20th period

= $84,600,000 * 0.311805 = $26,378,680

Price received for bonds = $63,073,097 + $26,378,680 = $89,451,777