Bond Premium, Entries for Bonds Payable Transactions Campbell Inc. produces and
ID: 2535956 • Letter: B
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, 10% bonds at a market (effective) interest rate of 9%, receiving cash of $24,389,347. 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.
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.)
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 $24,389,347 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.
Explanation / Answer
Date Accounting titles & Explanations Debit Credit 1) 1-Jul Cash 24,389,347 Premium on bonds payable 1,489,347 Bonds payable 22,900,000 2) 31-Dec interest expense 1070533 Premium on bonds payable (1,489,347/20) 74467 Cash (22,900,000*5%) 1145000 30-Jun interest expense 1070533 Premium on bonds payable 74467 Cash 1145000 3) total interest expense for year 1 1070533 4) yes 5) n = 4.50% t = 20 for principal use PV of $1 at 4.5% for 20 years for interest use PV of ordinary annuity at 4.5% for 20 years principal = 22,900,000 * 0.41464 9495256 interest paid 1145000 * 13.00794 = 14894091 bonds issue price 24,389,347