Question

Larkspur, Inc. issues $4.2 million, 5-year, 7% bonds at 103, with interest payable on January 1. The straight-line method is used to amortize bond premium. Prepare the journal entry to record the sale of these bonds on January 1, 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Answer 1

Dr. Cash $4,326,000

Cr. Premium on Bond $126,000

Cr. Bond Payable Account $4,200,000

Step-by-step explanation:

The difference between the face value of the bond and the sale value of the bond is known as premium or the discount on the bond. If the face value is higher from the sale value the bond is issued on the discount and if the sale value of the bond is higher than the face value the bond is issued on the premium.

In this question the bond is issued on premium and the amount of premium is calculated as follow

Premium on the Bond = Sale value - Face value = ($4,200,000 x 103%) - $4,200,000 = $126,000

The Premium will be amortized during the life of the bond to maturity and deducted from the interest expense.