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:

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.)

Question

26-11-2019
Business

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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:

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.)

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Answer:

Explanation:

1. CHECK THE FIRST IMAGE ATTACHED.

the cash received from the issuance of bond is debited with $26,625,925. The premium on bonds payable is credited with $1,625,925 and bonds payable is credited with $25,000,000.

Working notes:

Calculation is given below:

Premium on Bonds Payable = Cash − Bonds Payable

=$26,625,925−$25,000,000

=$1,625,925

2a and b. CHECK THE SECOND AND THIRD IMAGE.

It is given to record the semi-annual interest for June-30 and amortization of the premium in the journal entry. The interest expense is calculated by multiplying the interest rate with the value of bonds and dividing it by 2. Since the interest rate is given for one year, to calculate the semi-annual interest rate, only half of the year should be taken. The half of the year can be 6/12 or 1/2. The premium on amortization is calculated by dividing the premium on bonds by 20. Therefore, the calculated amortization premium on bonds payable is $81,296. The interest expense is calculated by subtracting the premium on bonds payable from cash. As per the debit and credit rules, the cash account is credited with $1,250,000, the premium on bonds payable is credited with $81,296, and bonds payable is credited with $1,168,704.

Therefore, the premium on bonds payable is $1,625,925.