Question

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

Answer 1

	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