On January 1,2013,Lane issues $700,000 of 7%,15-year bonds at a price of 106 3/4.The interest payments are made on June 30 and December 31.The straight-line method is used to amortize any bond discount or premium.Lane elects a fiscal year ending September 30.What is the appropriate adjusting journal entry required for September 30,2013?

Question

Quizplus · Accepted Answer

The adjusting entry is necessary to record the amortization of the bond premium for the period ending September 30,2013. Using the straight-line method, the bond premium amortization for the first year is ($700,000 x 6.75%)/2 = $23,625. Therefore, the appropriate adjusting entry for the fiscal year ending September 30,2013 is:
Interest Expense 11,625
Premium on Bonds Payable 12,000 (=$23,625/2) 
This will increase Lane's interest expense and reduce the carrying value of the bond premium on the balance sheet. Choice C correctly reflects this adjusting entry.

On January 1,2013,Lane Issues $700,000 of 7%,15-Year Bonds at a Price