Question

PR.11-02.ALGo
Bond Premium, Entries for Bonds Payable Transactions

Campbell Inc. produces and sells outdoor equipment. On July 1, Year 1, Campbell issued $31,800,000 of 10-year, 12% bonds at a market (effective) interest rate of 11%, receiving cash of $33,700,139. 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?
Yes

5. Compute the price of $33,700,139 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

Solution 1:

Journal Entries - Campbell Inc.
Year	Date	Particulars	Debit	Credit
1	1-Jul	Cash Dr	$33,700,139.00
		To Bond payable		$31,800,000.00
		To Premium on Bond payable		$1,900,139.00
		(Being bond issued at premium)

Solution 2:

Journal Entries - Campbell Inc.
Year	Date	Particulars	Debit	Credit
1	31-Dec	Interest expense Dr	$1,812,993.00
		Premium on bond payable Dr ($1,900,139/20)	$95,007.00
		To Cash ($31,800,000*12%*6/12)		$1,908,000.00
		(Being interest paid and premium amortized)
2	30-Jun	Interest expense Dr	$1,812,993.00
		Premium on bond payable Dr	$95,007.00
		To Cash		$1,908,000.00
		(Being interest paid and premium amortized)

Solution 3:

Total interest expense for Year 1 = $1,812,993 + $1,812,993 = $3,625,986

Solution 4:

Yes, bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest

Solution 5:

Computation of bond price
Table values are based on:
n=	20
i=	5.50%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.342729	$31,800,000.00	$10,898,781
Interest (Annuity)	11.950382	$1,908,000.00	$22,801,330
Price of bonds			$33,700,111