Question
In: Accounting
On January 1, 2018, for $18.7 million, Cenotaph Company purchased 10% bonds, dated January 1, 2018,...
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.
Solutions
Expert 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) | ||||||||||||
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