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On the first day of the fiscal year, a company issues a $5,000,000, 7%, five-year bond that pays semiannual interest of $175,000 ($5,000,000 × 7% × ½), receiving cash of $5,400,000. Journalize the first interest payment and the amortization of the related bond premium. If an amount box does not require an entry, leave it blank.

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Answer:

Dr Interest expense 135,000

Dr Bond premium 40,000

Cr Cash 175,000

Explanation:

Journal entry

Using the straight-line method

Premium =Cash proceeds - face value

5,400,000-5,000,000

=$400,000

The number of periods is:

=5 years * 2 since semi-annual

=10 periods

The amortization amount is thus:

400,000/10

=$40,000

Dr Interest expense (175,000-40,000) 135,000

Dr Bond premium 40,000

Cr Cash 175,000

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