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26 May, 09:05

On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 10-year, 7% bonds for $1,050,000, with interest payable semiannually. Orange Inc. purchased the bonds on the issue date for the issue price. If Lisbon uses the straight-line method for amortizing the premium, the journal entry to record the first semiannual interest payment by Lisbon Co. would include a debit to?

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  1. 26 May, 12:13
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    The journal entry is shown below:

    Interest Expense A/c Dr $32,500

    Premium on bonds payable A/c Dr $2,500

    To Cash A/c $35,000

    (Being the first semiannual interest is recorded)

    The computation is shown below:

    For Cash account

    = $1,000,000 * 7% : 2

    = $35,000

    For Premium on bonds payable A/c

    = ($1,050,000 - $1,000,000) : 2 * 10 years

    = $50,000 : 20 years

    = $2,500

    And, the remaining balance is debited to interest expense account
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