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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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Section
BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Bond premium, entries for bonds payable transactions, interest method of amortizing bond premium

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

Instructions

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds.

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 interest method. Round to the nearest dollar.

b. The interest payment on June 30, Year 2, and the amortization of the bond premium, using the interest method. Round to the nearest dollar.

3. Determine the total interest expense for Year 1.

1.

To determine

Bonds: Bonds are long-term promissory notes that are represented by a company while borrowing money from investors to raise fund for financing the operations.

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Premium on bonds payable: It occurs when the bonds are issued at a high price than the face value.

Effective-interest amortization method: Effective-interest amortization methodit is an amortization model that apportions the amount of bond discount or premium based on the market interest rate.

1.

To prepare: Journal entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1.

Explanation

Prepare journal entry for cash proceeds from the issuance of the bonds on July 1, Year 1.

Date Account Title and Explanation Post Ref Debit ($) Credit ($)
Year 1 Cash 26,625,925
July 1 Premium on Bonds Payable (1) 1,625,925
Bonds Payable 25,000,000
(To record issue of bonds at premium)

Table (1)

Working note:

Calculate premium on bonds payable...

2.

a.

To determine

To prepare: Journal entry to record first semiannual interest payment and amortization of bond premium on December 31, Year 1.

3.

To determine
The amount of total interest expense for Year 1.

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