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) Interest Payable for $30,000
B) Interest Expense for $32,500
C) Cash for $70,000
D) Premium on Bonds Payable for $5,500

Question

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) Interest Payable for $30,000
B) Interest Expense for $32,500
C) Cash for $70,000
D) Premium on Bonds Payable for $5,500

Quizplus · Accepted Answer

Interest expense = Interest - Amortization of premium on bonds payable = [$1,000,000 × (7% ÷ 2)] - [($1,050,000 - $1,000,000) / (10 × 2)] = $35,000 - $2,500 = $32,500
The journal entry to record the first semiannual interest payment by Lisbon Co. would include a debit to Interest Expense for $32,500.

On the First Day of the Fiscal Year, Lisbon Co