A ten-year bond issue of $400,000, interest rate of 9% paid semiannually, is sold for $440,000 when the market rate is 8%. The bonds were not sold between interest dates and the straight-line amortization method is used. The entry to record the first interest payment would include

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The premium on bonds payable is amortized over the life of the bond. Since the bond was sold at a premium ($440,000 - $400,000 = $40,000), and the straight-line method is used, the premium amortization per period is $40,000 / 20 periods = $2,000. Thus, the entry includes a debit to Premium on Bonds Payable of $2,000.

A Ten-Year Bond Issue of $400,000, Interest Rate of 9