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 toA. Interest Payable for $30,000 B. Cash for $70,000 C. Interest Expense for $32,500 D. Premium on Bonds Payable for $5,500

Answer 1

C. Interest Expense for $32,500

interest expense 32,500 debit

premium on BP 2,500 debit

cash 35,000 credit

--to record interest payment--

Step-by-step explanation:

proceeds: 1,050,000

face value: 1,000,000

premium on BP 50,000

straight line method is used therefore, we amortize the premium equally between payment:

the bond is outstanding for 10 years at 2 payment per year: 20 payment

50,000 / 20 = 2,500

now the cash outlay in favor to the bondholders:

1,000,000 x 7% / 2 = 35,000

The amortization decreasethe interest expense giving a value of 32,500

making option C correct.