Question

On January 1, MOA, Inc. issued and sold a $200,000, 5.5%, 20-year bond payable, and received proceeds of $250,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the premium. The journal entry to record the first interest payment is:

		Debit Bond Interest Expense $14,210; credit Cash $14,210.
		Debit Bond Interest Expense $11,000; credit Cash $11,000.
		Debit Bond Interest Expense $6,750; credit to Premium on Bonds Payable $1,250; credit Cash $5,500.
		Debit Bond Interest Expense $4,250; debit to Premium on Bonds Payable $1,250; credit Cash $5,500.
		Debit Bond Interest Expense $13,500; credit Premium on Bonds Payable $2,500; credit Cash $11,000.

Answer 1

The correct answer choice is “Debit Bond Interest Expense $4,250; debit to Premium on Bonds Payable $1,250; credit Cash $5,500”

The journal entry to record the first interest payment

Account Titles and Explanation	Debit ($)	Credit ($)
Interest Expenses A/c	4,250
Premium on Bond Payable A/c	1,250
To Cash A/c		5,500
[The journal entry to record the first interest payment]

Premium on Bond Payable

Premium on Bond Payable = Issue Price of the Bond - Face Value of the bond

= $250,000 - $200,000

= $50,000

Amortization of Premium on Bond during each semiannual period using straight line method of amortization

= $50,000 [20 Years x 2]

= $50,000 / 40

= $1,250

Cash Payment = Face value of the bond x Coupon rate x ½

= $200,000 x 5.50% x ½

= $5,500

Therefore, the Interest Expense to be debited = Cash Payment – Premium amortization

= $5,500 - $1,250

= $4,250