Question

Bond premium, entries for bonds payable transactions Instructions Present Value Tables Chart of Accounts Journal Final Questions Instructions Campbell Inc. produces and sells outdoor equipment. On July 1, 20Y1, Campbell issued $21,000,000 of 10-year, 12% bonds at a market (effective) interest rate of 11%, receiving cash of $22,254,809. 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, 2012, 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 $22,254,809 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

Face Value of Bonds = $21,000,000
Issue Value of Bonds = $22,254,809

Premium on Bonds = Issue Value of Bonds - Face Value of Bonds
Premium on Bonds = $22,254,809 - $21,000,000
Premium on Bonds = $1,254,809

Annual Coupon Rate = 12%
Semiannual Coupon Rate = 6%
Semiannual Coupon = 6% * $21,000,000
Semiannual Coupon = $1,260,000

Time to Maturity = 10 years
Semiannual Period = 20

Semiannual Amortization of Premium = Premium on Bonds / Semiannual Period
Semiannual Amortization of Premium = $1,254,809 / 20
Semiannual Amortization of Premium = $62,740

Semiannual Interest Expense = Semiannual Coupon - Semiannual Amortization of Premium
Semiannual Interest Expense = $1,260,000 - $62,740
Semiannual Interest Expense = $1,197,260

Answer 1 and 2.

Credit Date July 1, 20Y1 Debit 22,254,809 21,000,000 1,254,809 Dec. 31, 20Y1 General Journal Cash Bonds Payable Premium on Bonds Payable Interest Expense Premium on Bonds Payable Cash Interest Expense Premium on Bonds Payable Cash 1,197,260 62,740 1,260,000 June 30, 20Y2 1,197,260 62,740 1,260,000

Answer 3.

Interest Expense for 20Y1 = $1,197,260

Answer 4.

Yes. Proceed from issue of bonds will always be greater than the face amount when the contract rate is greater than the market rate of interest.

Answer 5.

Annual Interest Rate = 11%
Semiannual Interest Rate = 5.50%

Present Value of Face Amount = $21,000,000 * PV of $1 (5.50%, 20)
Present Value of Face Amount = $21,000,000 * 0.34273
Present Value of Face Amount = $7,197,330

Present Value of Semiannual Interest Payments = $1,260,000 * PVA of $1 (5.50%, 20)
Present Value of Semiannual Interest Payments = $1,260,000 * 11.95038
Present Value of Semiannual Interest Payments = $15,057,479

Price Received for the Bonds = Present Value of Face Amount + Present Value of Semiannual Interest Payments
Price Received for the Bonds = $7,197,330 + $15,057,479
Price Received for the Bonds = $22,254,809