Bond Premium Entries for Bonds Payable Transactions Campbell

Bond Premium, Entries for Bonds Payable Transactions Campbell Inc. produces and sells outdoor equipment. On July 1 Year 1 Campbell issued $32,700 000 of 10 year 11% bonds at a market e ective interest rate of % receiving cash of $36,953,508. 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.)

Solution

1) Journal Entry for Issuance of Bond

Cash Account Debit 3,69,53,508

To 9% Bond Account Credit 3,27,00,000

To Premium on bond issued Credit 42,53,508

(Being Bond issued at a premium On July 1)

2) a) Entry for Interest Payments and Amortization of bond premium

Interests Expenses Debit 1,585,825 (Balancing Figure)

Bond premium Debit 212,675 (4253508/20)

To Interest Payable Credit 1,798,500 (32700000*11%/2)

(Being Interest expenses recorded and bond premium amortized for December 31)

b) Entry for Interest Payments and Amortization of bond premium

Interests Expenses Debit 1,585,825 (Balancing Figure)

Bond premium Debit 212,675 (4253508/20)

To Interest Payable Credit 1,798,500 (32700000*11%/2)

(Being Interest expenses recorded and bond premium amortized for June 30)

3) The total interest expense for year 1 would be 3171649 (1585825+1585825)

4) Yes The bond proceeds will always be greater as the bond will trade at premium since its coupon rate (contract rate) is higher than the market rate of interest.

5) Present value of face value of bond = 3,27,00,000/ (1+ discount rate/2)^20.

Present value of semi annual interest payment = 1798500/ (1+discount rate/2)^1. This is for year 1 semi annual payment.

Price received of the bond= 36953508/1 = 36953508. Since it is received now, it will be divided by 1 only.