Question

Campbell Inc. produces and sells outdoor equipment. On July 1, Year 1, Campbell Inc. issued $21,000,000 of 10-year, 13% bonds at a market (effective) interest rate of 12%, receiving cash of $22,204,241. 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, 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.

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 $22,204,241 received for the bonds by using the tables shown in Present Value Tables. (Round to the nearest dollar.)

*Refer to the Chart of Accounts for exact wording of account titles.

Answer 1

In the books of Campbell Inc. :

Transaction / Event	Date	Account	Debit	Credit
			$	$
1.	July 1, Y1	Cash	22,204,241
		Bonds Payable		21,000,000
		Premium on Bonds Payable		1,204,241
2a.	Dec 31, Y1	Interest Expense	1,304,788
		Premium on Bonds Payable ( 1,204,241 / 20)	60,212.
		Cash ( 21,000,000 x 13% x 1/2)		1,365,000
2b.	June 30, Y2	Interest Expense	1,304,788
		Premium on Bonds Payable	60,212
		Cash		1,365,000

3. Total interest expense for Year 1 : $ 1,304,788.

4. Yes.

5. Price of the bonds = Semiannual coupons x PVA _{6%, n=20} + Par Value x PV _{6%, n=20} = $ 21,000,000 x 13% x 1/2 x 11.4699 + $ 21,000,000 x 0.3118 = 15,656,413.50 + 6,547,800 = 22,204,213.50