Kerwin Company borrowed $10,000 on a two-year, zero coupon note. The note was issued on December 31, 2008. The face amount of the note, $12,544, is to be paid at maturity on December 31, 2010.

Required:

1. Allocate the interest of $2,544 to the two one-year interest periods, using straight-line interest amortization.

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.