Question

On the first day of the fiscal year, a company issues a $3,700,000, 7%, 10-year bond that pays semiannual interest of $129,500 ($3,700,000 × 7% × ½), receiving cash of $4,607,506.

Journalize the first interest payment and the amortization of the related bond premium. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

Answer 1

Answer-

Date	Account Title and Explanation	Debit	Credit
	Interest Expenses (129,500-45,375)	84,125
	Premium on bonds payable	45,375
	Cash		129,500
	(To record first interest payment and bond premium amortization)

Working Note:-

Face Value of the Bond = $ 3,700,000

Issue Price of the Bond = $ 4,607,506

Premium received on the Bond = $ 4,607,506 - $ 3,700,000

= $ 907,506

Bond has been issued for 10 Years with 7% paying interest semi annually, which means the premium amount should be amortised for 20 Period (i.e, 1 Period = 6 Months).

Now, Amortisation of Bond for 1 Period = $ 907,506 / 20 Periods

= $ 45,375

Interest paid for Semi Annual Period = ($3,700,000 * 7%) / 2

= $ 129,500 (Already given in the Question)