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 $25,000,000 of 10-year, 10% bonds at a market (effective) interest rate of 9%, receiving cash of $26,625,925. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Required:

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

Two present value tables are provided: Present Value of $1 at Compound Interest Due in n Periods and Present Value of Ordinary Annuity of $1 per Period. Use them as directed in the problem requirements.

Present Value of $1 at Compound Interest Due in n Periods

0.03395

Present Value of Ordinary Annuity of $1 per Period

13.80075

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

Explanation / Answer

Answer 1 Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1 Journal   Accounting Equation Date Description Debit Credit Assets Liabilities Equity July.1 Cash $26,625,925 $26,625,925 Bond Payable $25,000,000 $25,000,000 Premium on Bonds Payable $1,625,925 $1,625,925 Answer 2-a Bond premium amortization per semi annual period = Premium on bond payable / No.of semi annual periods = $1625925/20 periods = $81296.25 Journal entry to record the first semiannual interest payment on December 31, Year 1 Journal   Accounting Equation Date Description Debit Credit Assets Liabilities Equity Dec.31 Interest Expense $1,168,704 -$1,168,704 Premium on bond payable $81,296 -$81,296 Cash $1,250,000 -$1,250,000 Answer 2-b Journal entry to record the semiannual interest payment on June 30, Year 2 Journal   Accounting Equation Date Description Debit Credit Assets Liabilities Equity June.30 Interest Expense $1,168,704 -$1,168,704 Premium on bond payable $81,296 -$81,296 Cash $1,250,000 -$1,250,000 Answer 3 Total Interest expense for Year 1 = Semi annual coupon payment - Bond amortization = $1250000 - $81296 = $11,68,704 Answer 4 Yes, 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. Answer 5 Computation of price received for bonds by using present value tables Present value of the face amount = $2,50,00,000 * 0.41464 = $10,366,000 Present value of semi annual interest payments = $1250000 * 13.00794 = $16,259,925 Price received for the bonds $26,625,925

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