Final answer:
When Grocery Corporation issues $315,953 in bonds, the Cash account (B/S) increases by $315,953, Bonds Payable (B/S) by $262,000, and Premium on Bonds Payable (B/S) by $53,953. Upon interest payment, Interest Expense (I/S) rises by $27,650, Cash decreases by $27,510, and Premium on Bonds Payable decreases by $140.
Step-by-step explanation:
When Grocery Corporation issues bonds, it affects both the Balance Sheet (B/S) and Income Statement (I/S). Initially, upon issuing the bonds, Cash account (B/S) increases by $315,953, and Bonds Payable (B/S) increases by $262,000, reflecting the face value of the bonds. The difference, $53,953, is reported as Premium on Bonds Payable (B/S). This premium is created because the bonds were issued at a higher price due to the market interest rate being lower than the bond's stated rate.
When the interest payment is recorded on December 31, the Interest Expense (I/S) increases by $27,650 (calculated as 7.50% of $262,000), and the Premium on Bonds Payable decreases by the difference between the stated interest paid ($27,510, which is 10.50% of $262,000) and the Interest Expense ($27,650), resulting in a decrease of $140. When Grocery Corporation records the interest payment on December 31, the Bond Payable (B/S) decreases by the amount of interest paid, and the Cash (B/S) decreases by the amount of interest paid. There's also a change in the Cash account, which decreases by $27,510 when the interest payment to bondholders is made.