Question

Bond Premium, Entries for Bonds Payable Transactions

Campbell Inc. produces and sells outdoor equipment. On July 1, Year 1, Campbell issued $22,900,000 of 10-year, 12% bonds at a market (effective) interest rate of 10%, receiving cash of $25,753,858. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

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:

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?

5. Compute the price of $25,753,858 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

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

Year	Particulars	L.F	Debit ($)	Credit ($)
Jul-01	Cash		25,753,859
	Unamortized Bond Premium			2,853,859
	Bond payable			22,900,000
	(for bond issued for 10 years)

2. Interest payment on June 30, Year 2, and the amortization of the bond premium, using the straight-line method will be recorded as shown below:

Year	Particulars	L.F	Debit ($)	Credit ($)
Jun-30	Interest expense		1,231,307
	Unamortized Bond Premium (2,853,859/20)		142,693
	Cash (22,900,000*12%*6/12)			1,374,000
	(For interest paid on 12% bonds and amortization of premium for half year)

3. Total interest expense for Year 1 will be:

Interest Paid (22,900,000*12%*6/12) = 1,374,000

Less: Amortized Premium (2,853,859/20) = 142,693

Interest Expense 1,231,307

4. Yes bond proceeds will always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest. Because in that case market offers less interest to the investors than the companies and so companies charge more amount on the bonds.

5. Issue price of bond is as calculated below:

Table value are based on:
n= 20
i= 10% market interest rate (5% semi-annual rate)
Cash Flow	Table Value	Amount	Present Value
Par (maturity value)	0.3769	22,900,000	8,630,769
Interest (annuity)	12.4622	1,374,000	17,123,077
			25,753,846