On December 31, 2018, Herndon Corporation issues 6%, 10-year convertible bonds payable with a face value of $1,000,000. 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.

Requirements

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 term of the bonds using Excel.

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 $400,000 into 120,000 shares of Herndon $1-par common stock.

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

Requirements

1. Show how each relevant item would be reported on the Brigham Foods classified balance sheet. Include headings and totals for current liabilities and long-term liabilities.

2. Answer the following questions about Brigham Food’s financial position at December 31, 2018:

a. What is the carrying amount of the bonds payable (combine the current and long-term amounts)?

b. Why is the interest-payable amount so much less than the amount of interest expense?

3. How many times did Brigham Foods cover its interest expense during 2018?

4. Assume that all of the existing liabilities are included in the information provided. Calculate the leverage ratio and debt ratio of the company. Use year-end figures in place of averages where needed for the purpose of calculating ratios in this problem. Evaluate the health of the company from a leverage point of view. Assume the company only has common stock issued and outstanding. What other information would be helpful in making your evaluation?

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Mortgage note payable, current portion.. Leases payable (long-term). Bonds payable, long-term.. Mortgage note payable, long-term .. Bonds payable, current portion .. Interest expense... $4,500,000 Total assets .. Accumulated depreciation, $ 98,000 445,000 325,000 163,000 equipment. Discount on bonds payable (all long-term).. Operating income. Equipment.. Long-term investments (market value).. Interest payable. 21,000 311,000 50,000 360,000 744,000 229,000 400,000 76,000