On December 31. 2014, Herndon Corp. issues 5.5%, 10-year convertible bonds payab

Question

On December 31. 2014, Herndon Corp. issues 5.5%, 10-year convertible bonds payable with a maturity value of $4,000,000. The semiannual interest dates are June 39 and December 31. The market interest rate is 6%. Herndon Corp. amortizes bond discount by the effective-interest method. Requirements: 1. Use the PV function in Excel to calculate the issue price of the bonds. 2. Using Exhibit 9-4 of the bond discount as a model, prepare an effective-interest method amortization table for the term of the bonds. 3.Journalize the following transactions: a. Issuance of the bonds on December 31, 2014. Credit convertible bonds payable. B. Payment of interest and amortization of the bond discount on June 30, 2015. C. Payment of interest and amortization of the bond discount on December 31, 2015. D. Conversion by the bondholders on July 1, 2016, of bonds with face value of $1,600,000 into 120,000 shares of Herndon Corp.'s $1-par common stock. 4. Show how Herndon Corp. would report the remaining bonds payable on its balance sheet at December 31,2016.

Explanation / Answer

Value of bond = 4000000

Intt rate - 5.5% semi annually

Interest = (4000000*5.5%*6/12) = 11000

Step 1 : Present Value of Bonds Interest payment

Interst is paid every 6 months for 10 years i.e total periods =20 periods

Market Int rate = 6%

half year rate = 3%

PVOA = 11000 *14.8775

= 1636525

Step 2 :- Present Value of Bonds maturity value

Present value = 4000000*0.554

= 2216000

Total Bonds present Value/Issue Price = 2216000 +1636525

= 3852525

Discount on Bond = Maturity Value - Issue Price

= 4000000 - 3852525

= 147475

Journal entry for Issuance of bond is as follows :-

Ammortisation Schedule as well as accounting treatment of Interest payment and Discount amortisation :

D) Bonds payble will be depicted as Liabilities in Balance sheet

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.