The problem is: On the first day of the current fiscal year, 2,000,000 of 10-year, 7% bonds, with interest payable annually, were sold for $2,125,000. Present entries to record the following transactions for the current fiscal year.

a.) Issuance of the bond

This is what I did is it correct?
Cash 2,125,000
Bonds Payable 2,000,000
Premium on bonds payable 125,000

b.) First annual interest payment

This is what I did is it correct?
Interest Expense 140,000
Cash 140,000

c.)Amortization of bond premium for the year, using the straight-ling method of amortization.

I am not sure which numbers to use here but I know I have to multiply by a fraction, I think.

Can someone help.
Thanks
fustrated

The bond premium will be amortized over 10 years, so the annual amortization will be the bond premium (125,000) divided by the time frame (10 years) which equals $12,500 a year.

To record the amortization, debit premium for $12,500 and credit interest expense for $12,500. Since you are crediting an expense, you are reducing the expense which is needed so you can recognize the premium received over the life of the bond.

Everything else you did looks good.

Quote:

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Originally Posted by KongTheKonqueror

The bond premium will be amortized over 10 years, so the annual amortization will be the bond premium (125,000) divided by the time frame (10 years) which equals $12,500 a year.

To record the amortization, debit premium for $12,500 and credit interest expense for $12,500. Since you are crediting an expense, you are reducing the expense which is needed so you can recognize the premium received over the life of the bond.

Everything else you did looks good.

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Thank you for your help.:)