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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 to a.Premium on Bonds Payable for $5,500 b.Cash for $70,000 c.Interest Expense for $32,500 d.Interest Payable for $30,000

Respuesta :

Answer:

Explanation:

Before passing the journal entry, first ,we have to do the calculations which is shown below:

1. Interest amount paid:

= Issued amount × rate of interest on bonds × Half yearly basis

= $1,000,000 × 7% × 0.5

= $35,000

Amortizing the premium:

= (Premium amount - issued amount) ÷ time period

= ($1,050,000 - $1,00,000) ÷ 20 years

= $50,000  ÷ 20 years

= $2,500

The time period would be double of actual period given.

So, the Interest expense would be

= Interest amount paid - Amortizing the premium

= $35,000 - $2,500

= $32,500

Now the journal entry would be

Interest Expense A/c Dr                   $32,500

Premium on Bonds Payable A/c Dr $2,500

       To Cash A/c                                                  $35000

(Being first semiannual interest payment is recorded)

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