Question

On January 1, 2018, for $17.2 million, Cenotaph Company purchased 8% bonds, dated January 1, 2018, with a face amount of $19.2 million. For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. Required: 1. Prepare the journal entry to record interest on June 30, 2018, using the effective interest method. 2. Prepare the journal entry to record interest on December 31, 2018, using the effective interest method

Answer 1

Required: 1. Prepare the journal entry to record interest on June 30, 2018, using the effective interest method.

Date	accounts & explanation	debit	credit
June 30	Interest expense (17.2*10%*6/12)	0.86
	Discount on bonds payable		0.092
	Cash (19.2*8%*6/12)		0.768
	(To record interest)

Required: 2. Prepare the journal entry to record interest on dec 31, 2018, using the effective interest method.

Date	accounts & explanation	debit	credit
Dec 31	Interest expense (17.2+0.092*10%*6/12)	0.8646
	Discount on bonds payable		0.0966
	Cash (19.2*8%*6/12)		0.768
	(To record interest)