Chapter 9, Problem 69E

Exercise Issuance and Interest Amortization for Zero Coupon Note (Straight Line)

Kerwin Company borrowed $10,000 on a 2-year, zero coupon note. The note was issued on January 1, 2020. The face amount of the note, $12,544, is to be paid at maturity on December 31, 2021.

Required:

1. Assuming straight line amortization, calculate the interest expense for 2020 and 2021.
2. Prepare the entries to recognize the borrowing, the first year’s interest expense, and the second year’s interest expense plus redemption of the note at maturity.