Pina Company issued $2,500,000 face value of 12%, 20-year bonds at $2,928,977, a yield of 10%. Pina uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31. Required:
Prepare the journal entries.

Pina Company

Journal Entries:

Debit Cash $2,928,977

Credit 12% Bonds Payable $2,500,000

Credit Bonds Premium $428,977

To record the proceeds from the bonds issue, the bonds liability, and the premium.

June 30:

Debit Interest expense $146,449

Debit Amortization of premium $3,551

Credit Cash $150,000

To record the first interest payment and amortization of bonds premium.

December 31:

Debit Interest expense $146,271

Debit Amortization of Premium $3,729

Credit Cash $150,000

To record the second interest payment and amortization of bonds premium.

Explanation:

a) Data and Calculations:

Face value of 12% bonds = $2,500,000

Proceeds from bonds issue  2,928,977

Premium =                               $428,977

Coupon rate = 12%

Market yield rate = 10%

June 30:

Cash payment = $150,000 ($2,500,000 * 6%)

Interest expense $146,449 ($2,928,977 * 5%)

Amortized Premium  3,551 ($150,000 - $146,449)

Bonds value = $2,925,426 ($2,928,977 - $3,551)

December 31:

Cash Payment = $150,000 ($2,500,000 * 6%)

Interest expense $146,271 ($2,925,426)

Amortized premium 3,729 ($150,000 - $146,271)

Bonds value = $2,921,697 ($2,925,426 - $3,729)