Please 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:
To calculate the annual interest expense on the bonds, you need to follow these steps:
Step 1: Determine the face value of the bonds.
The face value of the bonds is given as $100,000.
Step 2: Calculate the premium.
The premium is the amount paid above the face value. In this case, the premium is $5,200.
Step 3: Calculate the premium amortization.
Premium amortization is the gradual reduction of the premium over the life of the bonds. Since the bonds have a 10-year term, divide the premium by the number of years, which is $5,200 / 10 = $520 per year.
Step 4: Calculate the annual interest expense.
The annual interest expense is based on the face value and the stated interest rate. Multiply the face value by the interest rate to get the annual interest payment, which is $100,000 x 8% = $8,000.
Step 5: Add the premium amortization to the annual interest payment.
To get the total annual interest expense, add the premium amortization to the annual interest payment. $8,000 + $520 = $8,520.
Therefore, the annual interest expense on the bonds would be $8,520.
In your journal entry, you would debit the Interest Expense account for $8,520 and credit the Cash or Bond Interest Payable account, depending on whether the interest payment is made or will be made in the future.