On January 1 2018 for 187 million Cenotaph Company purchased

On January 1, 2018, for $18.7 million, Cenotaph Company purchased 10% bonds, dated January 1, 2018, with a face amount of $20.7 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, 2018, using the effective interest method.

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

Solution

For interest Expense calculation, preparation of discount amortization required. Discount amortization: Semi annual period Cash Interest Interest Expense Discount Amortization Carrying Value January 1, 2018         1,87,00,000 June 30, 2018            10,35,000                11,22,000      87,000         1,87,87,000 December 31, 2018            10,35,000                11,27,220      92,220         1,88,79,220 Working: Semi annual coupon = Par Value x Semi annual coupon rate =         2,07,00,000 x 5% =            10,35,000 Interest Expense for: Beginnng Carrying Value x Semi -Annual market rate Interest Expense June 30, 2018         1,87,00,000 x 6% = 11,22,000 December 31, 2018         1,87,87,000 x 6% = 11,27,220 Now, Journal Entry is made as follows: Date Account titles and Expalantion Debit Credit June 30, 2018 Interest Expense $ 11,22,000 Discount on bonds payable $ 87,000 Cash $ 10,35,000 (To record interest expense) December 31, 2018 Interest Expense                11,27,220 Discount on bonds payable        92,220 Cash 10,35,000 (To record interest expense)