How do i calculate this problem and enter it in a journal entry: If a company issues 10-year, 8%, $100,000 bonds paying interest on an annual basis, at a $5,200 premium, the annual interest expense on the bonds will be:
Conner Enterprises issued $100,000 of 10%, 5-year bonds with interest payable semiannually. Determine the issue price if the bonds are priced to yield (a) 10%, (b) 8%, and (c) 12%.
Use financial calculator or Excel to calculate answers. Round answers to the nearest whole number.
To calculate the annual interest expense on the bonds, you need to understand the concepts of bond premiums and interest payments. Here's how you can calculate the annual interest expense and prepare the journal entry:
1. Calculate the annual interest payment:
The annual interest payment is calculated by multiplying the principal amount ($100,000) by the interest rate (8%).
Annual Interest Payment = Principal x Interest Rate
Annual Interest Payment = $100,000 x 8% = $8,000
2. Determine the premium amortization:
The premium on the bonds is $5,200, and it needs to be amortized over the life of the bond (10 years). Divide the premium by the number of years to get the annual amortization amount.
Annual Amortization Amount = Premium / Number of Years
Annual Amortization Amount = $5,200 / 10 = $520
3. Calculate the annual interest expense:
The annual interest expense is the sum of the annual interest payment and the annual premium amortization.
Annual Interest Expense = Annual Interest Payment + Annual Amortization Amount
Annual Interest Expense = $8,000 + $520 = $8,520
Now that you have calculated the annual interest expense, you can prepare the journal entry. Assuming the company is recording the interest payment and amortization separately, the journal entry would look like this:
Debit:
- Interest Expense: $8,520 (to record the annual interest expense)
- Premium on Bonds Payable: $520 (to record the annual premium amortization)
Credit:
- Cash (or Bonds Payable): $8,000 (to record the actual interest payment)
Please note that this is a simplified example, and there may be other factors involved in journal entries for bond transactions, such as discount or unamortized premium. It is always recommended to consult with an accounting professional or refer to specific accounting guidelines when preparing actual financial transactions.