Question

On June 30, 2017, Pina Company issued $3,700,000 face value of 13%, 20-year bonds at $3,978,349, a yield of 12% Pina uses the effective interest method to amortire bond premium or discount. The bonds pay semiannual interest on June 30 and December 31. Prepare the journal entries to record the following transactions. (Round answer to decimal places, e 38,548. If no entry is required, select "No Entry for the accoun tities and enter for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) (1) The issuance of the bonds on June 30, 2017. (2) The payment of Interest and the amortization of the premium on December 31, 2017. (3) The payment of Interest and the amortization of the premium on June 30, 2018 (4) The payment of interest and the amortization of the premium on December 31, 2018. Date Account Tities and Explanation (1) June 30, 2017 (2) December 31, 2017 (3) June 30, 2018

Answer 1

Journal entries:

No.	Date	Account title and explanation	Debit	Credit
1	June 30,2017	Cash	$3,978,349
		Bonds payable		$3,700,000
		Premium on bonds payable		$278,349
		[To record issuance of bonds]
2	Dec 31,2017	Interest expense	$238,701
		Premium on bonds payable	$1,799
		Cash		$240,500
		[To record interest payment and amortization of premium]
3	June 30,2018	Interest expense	$238,593
		Premium on bonds payable	$1,907
		Cash		$240,500
		[To record interest payment and amortization of premium]
4	Dec 31,2017	Interest expense	$238,479
		Premium on bonds payable	$2,021
		Cash		$240,500
		[To record interest payment and amortization of premium]

Calculations:

Date	Cash paid	Interest expense	Premium amortization	Carrying value
June 30,2017				$3,978,349
Dec 31,2017	$240,500	$238,701	$1,799	$3,976,550
June 30,2018	$240,500	$238,593	$1,907	$3,974,643
Dec 31,2018	$240,500	$238,479	$2,021	$3,972,622

Cash paid = Face value x 13% x 6/12 = $3,700,000 x 13% x 6/12 = $240,500

Interest expense = Preceding carrying value x 12% x 6/12

Premium amortization = Cash paid - Interest expense

Carrying amount = Preceding carrying value - Premium amortized

Balance Sheet:

Pina Company
Balance Sheet(partial)
For the year ended December 31,2018
Liabilities:
Bonds payable	$3,700,000
Add: Premium on bonds payable	$272,622
Total	$3,972,622

Additional Requirements:

1. Interest expense reported for 2018:

Interest expense, June 30,2018	$238,593
Interest expense, Dec 31,2018	$238,479
Total interest expense for 2018	$477,072

2.The bond interest expense reported in 2018 will be greater than the amount that would be reported if the straight-line method of amortization were used.

Total Cash paid in 2018 (240,500+240,500)	$481,000
Less: Premium amortized-straight line (278,349/20 years)	$13,917
Interest expense	$467,083

Interest expense of $477,072 under effective interest greater than the interest expense of $467,083 under straight-line

3.

Total cash paid (481,000 x 20 years)	$9,620,000
Less: Total cash received	$3,978,349
Total Cost of borrowing	$5,641,651