On January 1, the first day of the fiscal year, a company issues a $7,500,000, 8%, five-year bond that pays semiannual interest of $300,000 ($7,500,000 x 8% x ½), receiving cash of $7,811,873. Journalize the first interest payment and the amortization of the related bond premium. Round to the nearest dollar. Refer to the Chart of Accounts for exact wording of account titles.

Answer and Explanation:

The journal entries are shown below:

1. Cash  Dr  $7,811,873  

  To Bonds payable    $7,500,000

  To Premium on bonds Payable  $311,873  

(Being the bond payable is recorded)

For recording this we debited the cash as it increased the assets and credited the bond payable & premium as it also increased the liabilities

2. Interest expenses $268,812.7  

Premium on Bonds payable  $31,187.3   ($311,873 ÷ 10 years)

   To Cash  $300,000

(being cash paid is recorded)

For recording this we debited the interest expense and premium as it increased the expenses and credited the cash as it decreased the assets

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