Question

On January 1, 2021, for $18 million, Marker Company issued 10% bonds, dated January 1, 2021, with a face amount of $20 million. For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on June 30 and December 31.

Required:
1. Prepare the journal entry to record interest on June 30, 2021, using the effective interest method.
2. Prepare the journal entry to record interest on December 31, 2021, using the effective interest method.

Answer 1

1.

Date	General Journal	Debit	Credit
June 30, 2021	Cash ($20,000,000 * 5%)	$1,000,000
	Discount on bonds investment	$80,000
	... Interest revenue ($18,000,000 * 6%)		$1,080,000
	(To record the interest revenue)

2.

Date	General Journal	Debit	Credit
December 31, 2021	Cash ($20,000,000 * 5%)	$1,000,000
	Discount on bonds investment	$84,800
	... Interest revenue ($18,000,000 + $80,000) * 6%		$1,084,800
	(To record the interest revenue)