On January 1, 2016, for $17.5 million, Cenotaph Company purchased 8% bonds, date

Question

On January 1, 2016, for $17.5 million, Cenotaph Company purchased 8% bonds, dated January 1, 2016, with a face amount of $19.5 million. For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

Prepare the journal entry to record interest on June 30, 2016, using the effective interest method

1.

Prepare the journal entry to record interest on June 30, 2016, using the effective interest method

Explanation / Answer

Journal entry to record interest on June 30, 2016, using the effective interest method is shown as below:

Working Notes:

General Journal Year Particulars L.F Debit ($) Credit ($) 2016 Jan-01 Cash $17.5 Discount on Bonds Payable $2.0           Bonds Payable $19.5 (For Sold 8% $19.5 million at $17.5 million) 2015 Jun-30 Bond Interest Expense $0.88           Unamortized Bond Discount $0.10            Cash $0.78 (For paid semi-annual interest on 8% bonds for 6 months and amortization of discount for half year)

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