On January 1, 2021, for $18.9 million, Cenotaph Company purchased 10% bonds, dated January 1, 2021, with a face amount of $20.9 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.

1. Dr Interest expense $1,134million

Cr Discount on bonds payable $89,000

Cr Cash $1,045million

2. December 31,2021

Dr Interest expense $1,141,200

Cr Discount on bonds payable 96,200

Cr Cash $1,045,000

Explanation:

1. Preparation of the journal entry to record interest on June 30, 2021, using the effective interest method.

June 30,2021

Dr Interest expense $1,134million

[$18.9 million x 12%.x 6/12]

Cr Discount on bonds payable $89,000

($1,134million-$1,045million)

Cash [$20.9 million x 10% x 6/12] $1,045million

[To record semi-annual interest payment]

2. Prepareion the journal entry to record interest on December 31, 2021, using the effective interest method.

DateAccount title and ExplanationDebitCredit

December 31,2021Interest expense [($18.9 million + $120,000) x 12% x 6/12]$1,141,200

Discount on bonds payable 96,200

$1,141,200-$1,045,000

Cash [$20.9 million x 10% x 6/12] $1,045,000

[To record semi-annual interest payment]

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