Question

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?

Answer 1

Answer:

Explanation:

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