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.

Dr Interest expense 135,000

Dr Bond premium40,000

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 premium40,000

Cr Cash 175,000

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