Question

Campbell Inc. produces and sells outdoor equipment. On July 1, 20Y1, Campbell issued $30,000,000 of 10-year, 10% bonds at a market (effective) interest rate of 9%, receiving cash of $31,951,110. 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, 20Y1.*2. Journalize the entries to record the following:*a. The first semiannual interest payment on December 31, 20Y1, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)b. The interest payment on June 30, 20Y2, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)3. Determine the total interest expense for 20Y1.4. 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 $31,951,110 received for the bonds by using the present value tables. (Round to the nearest dollar.)

Answer 1

Answer:

Cash   31,951,110 debit

  Bonds Payable   30,000,000 credit

  Premium on BP      1, 951,  110 credit

--to record issuance of bonds--

interest expense   1,402,444.5 debit

Premium on BP          97,555.5 debit

                cash                       1,500,000 credit

--to record payment of interest of Dec 31th--

interest expense   1,402,444.5 debit

Premium on BP          97,555.5 debit

                cash                       1,500,000 credit

--to record payment of interest of June 30th--

Interest expense for 20Y1: 1,402,444.5 dollars

4.- Yes, as the market is willing to accept a higher price o nthe bond as it yields above the market.

Explanation:

proceeds:   31,  951,  110

face value: 30,000,000

premium       1, 951,   110

the premium is the difference between the proceeds and face value.

It will be amortized over 20 payment periods:

1,951,110 / 20 = 97,555.5

this will be subtracted from the interest cash payment to determinate the interest expense:

30,000,000 x 5% = 1,500,000

1,500,000 - 97,555.5 = 1,402,444.5

Under straight line mehtod all entries are the same.