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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 amortization of the premium (by the straight-line method) for the year by Lisbon Co. includes a debit to

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Answer:

Explanation:

The journal entry is shown below:

Interest expense A/c Dr $32,500

Premium on Bonds payable A/c Dr $2,500

      To Cash A/c $35,000    

(Being the amortization of the premium is recorded)

The computation is shown below:

For Premium on Bonds payable

= ($1,050,000 - $1,000,000) ÷ 10 year × 2

= $2,500

For cash account

= ($1,000,000 × 7% ÷ 2)

= $35,000

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