Question

Campbell Inc. produces and sells outdoor equipment. On July 1, 20Y1, Campbell issued $87,000,000 of 10-year, 10% bonds at a market (effective) interest rate of 9%, receiving cash of $92,658,219. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Required: 1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 20Y1.* 2. Journalize the entries to record the following:* a. The first semiannual interest payment on December 31, 20Y1, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.) b. The interest payment on June 30, 20Y2, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.) 3. Determine the total interest expense for 20Y1. 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 $92,658,219 received for the bonds by using the present value tables. (Round to the nearest dollar.) *Refer to the Chart of Accounts for exact wording of account titles.

Answer 1

	Date	Accounting titles & Explanations					Debit	Credit
1)	1-Jul	Cash					92,658,219
		Premium on bonds payable						5,658,219
		Bonds payable						87,000,000
2)	31-Dec	interest expense					4067089
		Premium on bonds payable			(5,658,219/20)		282911
		Cash		(87,000,000*10%*1/2)				4350000
	30-Jun	interest expense					4067089
		Premium on bonds payable					282911
		Cash						4350000
3)		total interest expense for year 1				4067089
4)		yes
5)		n =	4.5%
		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
		87,000,000*.41464 =				36073680
		interest paid
		4350000*13.00794				56584539
		bonds issue price				92,658,219