Premium Amortization 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.

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

Bond premium$40,000  

            To Cash  $175,000

(Being the interest payment is recorded)

Explanation:

The journal entry is shown below:

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

Bond premium$40,000  

            To Cash  $175,000

(Being the interest payment is recorded)

For recording this we debited the interest expense and bond premium and credited the cash as it reduced the assets

The computation is shown below:

For premium

= Cash proceeds - face value

= $5,400,000 - $5,000,000

= $400,000

And,

The number of periods is:

= 5 years × 2

= 10 years

And,

The amortization amount

= $400,000 ÷ 10 years

= $40,000

We assumed the straight-line method is followed

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