Campbell Inc. produces and sells outdoor equipment. On July 1, Year 1, Campbell

Question

Campbell Inc. produces and sells outdoor equipment. On July 1, Year 1, Campbell issued $11,300,000 of 10-year, 9% bonds at a market (effective) interest rate of 7%, receiving cash of $12,906,046. 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 $12,906,046 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.

Explanation / Answer

1) Journal entry: Date Accounts Titles Debit $ Credit $ July 1, Y1 Cash 12906046 Bond payable 11300000 Premium on Bond Issued 1606046 (being issue of bonds at premium) 2 a) Dec 31, Y1 Interest expense 428198 Premium on Bond Issued 80302 Cash 508500 11300000*4.5% (1606046/20 = 80302.30) 2b) June 30, Y2 Interest expense 428198 Cash 80302 Cash 508500 11300000*4.5% (1606046/20 = 80302.30) 3) The total interest expense for Year 1 = $428198 4) Yes, the bond's proceeds would be always greater. 5) Through Present Value, calculation of Bond's value : PV = coupon * PVIFA(market rate, n) + Par value * PVIF(market rate, n) 508500 * PVIFA(3.5%, 20) + 11300000 * PVIF (3.5%, 20) 508500*14.2124 + 11300000 * 0.5026 = 12906385 or 12906046

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