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1 February, 13:48

On the first day of the fiscal year, a company issues a $5,000,000, 7%, five-year bond that pays semiannual interest of $175,000 ($5,000,000 * 7% * ½), receiving cash of $5,400,000. Journalize the first interest payment and the amortization of the related bond premium. If an amount box does not require an entry, leave it blank.

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  1. 1 February, 17:19
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    Dr Interest expense 135,000

    Dr Bond premium 40,000

    Cr Cash 175,000

    Explanation:

    Journal entry

    Using the straight-line method

    Premium = Cash proceeds - face value

    5,400,000-5,000,000

    =$400,000

    The number of periods is:

    =5 years * 2 since semi-annual

    =10 periods

    The amortization amount is thus:

    400,000/10

    =$40,000

    Dr Interest expense (175,000-40,000) 135,000

    Dr Bond premium 40,000

    Cr Cash 175,000
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