Question

In: Accounting

Bond Premium, Entries for Bonds Payable Transactions Campbell Inc. produces and sells outdoor equipment. On July...

Bond Premium, Entries for Bonds Payable Transactions

Campbell Inc. produces and sells outdoor equipment. On July 1, Year 1, Campbell issued $57,100,000 of 10-year, 13% bonds at a market (effective) interest rate of 11%, receiving cash of $63,923,718. 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

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. 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.

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 $63,923,718 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

Solutions

Expert Solution

Date Accounting titles & Explanations Debit Credit
1) 1-Jul Cash 63,923,718
Premium on bonds payable 6,823,718
Bonds payable 57,100,000
2) 31-Dec interest expense 3370314
Premium on bonds payable (6823718/20) 341186
Cash (57,100,000*13%*1/2) 3711500
30-Jun interest expense 3370314
Premium on bonds payable 341186
Cash 3711500
3) total interest expense for year 1
(3,370,314*2) 6740628.2
4) yes
5) n = 5.50%
t = 20
for principal use PV of $1 at 5.5% for 20 years
for interest use PV of ordinary annuity at 5.5% for 20 years
principal
57,100,000*.34273 19569883
interest paid
3711500* 11.95038 44353835
bonds issue price         63,923,718

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