With straight-line amortization of the premium...
1) divide total premium by (2 times per year x # of years) = 2 x 10 = 20 = amount to amortize premium for each 6 month period
2) Calculate the coupon: face * (coupon rate / 2) = interest payable every 6 months
3) subtract...#2 minus #1 = interest expense for the period (with straight-line amortization this amount will be constant)...the difference b/t what you pay and what you expense amortizes the premium...
4) for each period: begin premium balance - #1 = end premium balance
Bonds pay interest semi-annually. So a half-year's interest expense would be 3,000,000 times 8% divided by 2. You'll have to accrue the interest at 12/31 and it's partially offset by the premium amortization.
the formula for MONTHLY interest expense is (initial value x interest rate in decimal form)/12. Decimal form meaning 8% is .08. Since you are paying your interest twice a year, you would do the same equation, just divide (initial value x interest rate) by 2. It will state in your problem whether you pay interest every month, or if the principal and interest is all paid at once, at maturity. If you pay interest every month, your journal entry will be: DR interest expense, CR cash. If you pay off the interest as a whole at maturity, every 6 months the journal entry will be DR Interest Expense and CR Interest payable. Once it is time to pay the interest off at maturity, you will DR interest payable and CR cash. I'll leave the actual numbers and calculations up to you. good luck!
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I have a problem in my accounting homework that I can't seem to get right.
Jaggar Company sold $3,000,000, 8%, 10-year bonds on July 1, 2014. The bonds were dated July 1, 2014, and pay interest July 1 and January 1. Jaggar Company uses the straight-line method to amortize bond premium or discount. Assume no interest is accrued on June 30.
July 1,2014
Cash DR 3,090,000
Bonds Payable CR 3,000,000
Premium on bonds payable CR 90,000
Dec 31,2014
Interest expense DR?
Premium on bonds payable DR 4500
Interest Payable CR ?
Prepare journal entries assuming that the bonds sold at 96
July 1,2014
Cash DR 2,880,000
Bonds Payable DR 120,000
Discount on bonds payable CR 3,000,000
Dec 31,2014
Interest expense DR?
Discount on bonds payable CR 6,000
Interest payable CR?
I dont know how to find the interest expense and payable!! If someone will please explain to me.
Thanks
