Journal entries for bond coupon payments and retirement. (Adapted from a problem by S. Zeff.) On December 31, Year 7, at the close of Mendoza Corporation's fiscal year, the company has outstanding \(\$ 1\) million face value of 12 -percent semiannual coupon bonds, with payments due on July 1 and December 31 each year through the bonds' maturity date of December 31, Year 16. The company issued the bonds at a market yield (interest rate) of 10 percent, compounded semiannually. On December 31, Year 7, the market interest rate for similar bonds is 14 percent, compounded semiannually. The company uses the effective interest method of accounting for these bonds, rounds computations to the nearest dollar, and closes its books once per year, on December 31.

a. Give the journal entries to record the company's interest expense for both the first and the second payments during Year 7 .

b. Suppose the firm repurchases one-half of the bonds for cash in the open market on December 31, Year 7, at the price implied by the market interest rate of 14 percent compounded semiannually on that date. Give the journal entry, ignoring income taxes.

c. How would the gain or loss in \(\mathbf{b}\) appear on the income statement?