Question

On December 31, 2018, Herndon Corporation issues 5%, 10-year convertible bonds payable with a face value of $2,000,000. The semiannual interest dates are June 30 and December 31. The market interest rate is 7%. Herndon amortizes bond discounts using the effective-interest method.

1. Use the pv function in excel to calculate the issue price of the bonds.

2. Prepare an effective-interest method amortization table for the first four semiannual interest periods.

3. Journalize the following transactions:

a. Issuance of the bonds on December 31, 2018. Credit convertible Bonds Payable.

b. Payment of interest and amortization of the bond discount on June 30, 2019.

c. Payment of interest and amortization of the bond discount on December 31, 2019.

d. Conversion by the bondholders on July 1, 2020, of bonds with a total face value of $800,000 into 60,000 shares of Herndon's $1-par common stock.

4. Show how Herndon would report the remaining bonds payable on its balance sheet at December 31, 2020.

Answer 1

1) Use the PV function in Excel to calculate the issue price of the bonds
Face Value	$                                2,000,000.00
Semiannual Coupon Rate = 5%/2	2.50%
Semiannual Coupon payment	$                                     50,000.00
Period	20
Rate = 7%/2	3.50%
Current Price = PV(3.5%,20,-50000,-2000000)	$                                     1,715,752
2) Using Exhibit 9-4 as a model, prepare an effective-interest method amortization table forthe term of the bonds.
	Herndon Corporation
	Amortization Table
A	B	C	D	E
Semiannual interest Rate	Interest Payment	Interest Expense = 3.5% x prev. year carrying Amt	Discount Amortization (C - B)	Discount Account Balance E -D	Bond Carrying Amount 2000000-E
12-31-2018				$  284,248.07	$          1,715,752
6-30-2019	$                                     50,000.00	$            60,051.32	$         10,051.32	$  274,196.75	$     1,725,803.25
12-31-2019	$                                     50,000.00	$            60,403.11	$         10,403.11	$  263,793.63	$     1,736,206.37
6-30-2020	$                                     50,000.00	$            60,767.22	$         10,767.22	$  253,026.41	$     1,746,973.59
12-31-2020	$                                     50,000.00	$            61,144.08	$         11,144.08	$  241,882.34	$     1,758,117.66
3)
Accounts & Titles	Debit	Credit
a)
Cash	$                                1,715,751.93
Discount on Bonds Payable	$                                   284,248.07
Convertible  Bonds Payable		$       2,000,000.00
b)
Interest Expense	$                                     60,051.32
Discount on Bonds Payable		$            10,051.32
Cash		$            50,000.00
c)
Interest Expense	$                                     60,403.11
Discount on Bonds Payable		$            10,403.11
Cash		$            50,000.00
d)
Convertible  Bonds Payable (40% x  $1,746,973.59 )	$                                   698,789.44
Discount on bonds payable account (40% x  $253,026.41 )	$                                   101,210.56
Common Stock		$            60,000.00
Additional paid-in capital		$          740,000.00
4)
Herndon Corporation
Partial Balance Sheet
Bonds Payable (2000000 - 800000)	$                                1,200,000.00
Less: Discont on Bonds Payable =( $241,882.34  x 60%)	$                                   145,129.40	$       1,054,870.60