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 $66,200,000 of 10-year, 14% bonds at a market (effective) interest rate of 12%, receiving cash of $73,792,769. 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.Please Include if the amount is Debit or Credit.

Cash ______

Premium on Bonds Payable ______

Bonds Payable_______

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.)Please Include if the amount is Debit or Credit.

Interest Expense________

Premium Bonds Payable______

Cash _________

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.)Please Include if the amount is Debit or Credit.

Interest Expense_________

Premium on Bonds Payable________

Cash_________

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 $73,792,769 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.

Explanation / Answer

In the books of Campbell Inc.

3. Total interest expense for Year 1 : $ 4,254,362.

4. Yes

5.

Transaction / Event Account Titles Debit Credit $ $ 1. July 1 Cash 73,792,769 Premium on Bonds Payable 7,592,769 Bonds Payable 66,200,000 2. a. Dec 31 Interest Expense 4,254,362 Premium on Bonds Payable ( 7,592,769 / 20) 379,638 Cash ( $ 66,200,000 x 14% x 1/2) 4,634,000 2. b. June 30 Interest Expense 4,254,362 Premium on Bonds Payable 379,638 Cash 4,634,000

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