Weather Corp. issued 10-year, 8%, $100,000 bonds paying interest on an annual ba

Question

Weather Corp. issued 10-year, 8%, $100,000 bonds paying interest on an annual basis, at a $5,200 premium. Which one of the following statements is true? a. Weather will receive $94,800 as the issue price. b. Weather's annual interest expense on the bonds will be less than the amount of interest payments to bondholders each year. c. The cash paid to bondholders will be $520 each interest period. d. Weather's annual interest expense on the bonds will be greater than the amount of interest payments to bondholders each year.

Explanation / Answer

The correct asnwer is option B.

The Annual interest expense will be less than the amount of interest payment to bondholders each year. if we use straight line amortisation then the journal entry for the first payment will be:

Interest expense A/c Dr $7480.

Premium on Bonds payable A/C Dr $520

Cash Cr $8000.

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