Answer:
Dr cash $420,000
Cr bonds payable $400,000
Cr premium on bonds payable $20,000
Dr interest expense($40000-$2,000) $38,000
Dr premium on bonds payable $2,000
Cr cash $40,000
Explanation:
The bond price is the pv of all cash inflows promised by the bond which includes annual coupon and repayment of face value at redemption:
bond price=face value *105%
bond price=$400,000*105%=$420000
The cash proceeds from the issue would be debited to cash while bonds payable is credited with $400,000 and premium on bonds payable is credited with $20,000.
amortization of premium=$20,000/10=$2,000
interest payment=10%*$400,000=$40,000
