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. The journal entry to record the amoritization of the bond premium (by straight-line method) for the year by Orange Inc. includes a credit to:
A) Interest Revenue for $5,000
B) Interest Revenue for $2,500
C) Investment in Lisbon Co. Bonds $5,000
D) Investment in Lisbon Co. Bonds $2,500

Question

Quizplus · Accepted Answer

The bond premium of $50,000 ($1,050,000 - $1,000,000) is amortized over 10 years. Using the straight-line method, the annual amortization is $5,000 ($50,000 / 10 years). This amount is credited to the Investment in Lisbon Co. Bonds account.

On the First Day of the Fiscal Year, Lisbon Co