The first interest payment on July 1 includes a debit to premium on bonds payable for the amortized amount of $10,000 and a debit to bond interest expense for the interest cost of $70,000. This reflects the appropriate recognition of interest expense and the amortization of the bond premium in accordance with the effective interest method.
Debit premium on bonds payable for $10,000: The bond was issued at a premium of $58,000 ($2,058,000 - $2,000,000). The premium needs to be amortized over the life of the bond using the effective interest method. For the first interest payment, a portion of the premium is amortized, which is calculated as the effective interest rate (7%) multiplied by the beginning carrying amount of the bonds. In this case, it is $2,058,000 * 7% = $144,060 for the full year. Since interest is paid semi-annually, the first interest payment would be $144,060 / 2 = $72,030. Therefore, the premium on bonds payable is debited by the amortized amount.
Debit bond interest expense for $70,000: The total cash interest payment for the first semi-annual period is $2,000,000 * 8% * 6/12 = $80,000. However, the interest expense recognized on the income statement is based on the effective interest rate, which is 7%. Therefore, the bond interest expense is calculated as $2,058,000 * 7% = $144,060 for the full year, and for the first semi-annual period, it is $144,060 / 2 = $72,030. This amount needs to be recognized as an expense on the income statement.
The correct answer is D. Debit premium on bonds payable for $10,000 and debit bond interest expense for $70,000.