Question

You are the new controller for Moonlight Bay Resorts. The company CFO has asked you to determine the company’s interest expense for the year ended December 31, 2021. Your accounting group provided you the following information on the company's debt: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

On July 1, 2021, Moonlight Bay issued bonds with a face amount of $2,000,000. The bonds mature in 20 years and interest of 11% is payable semiannually on June 30 and December 31. The bonds were issued at a price to yield investors 12%. Moonlight Bay records interest at the effective rate.

At December 31, 2020, Moonlight Bay had a 10% installment note payable to Third Mercantile Bank with a balance of $530,000. The annual payment is $75,000, payable each June 30.

On January 1, 2021, Moonlight Bay leased a building under a finance lease calling for four annual lease payments of $40,000 beginning January 1, 2021. Moonlight Bay’s incremental borrowing rate on the date of the lease was 11% and the lessor’s implicit rate, which was known by Moonlight Bay, was 10%.

Required: Calculate interest expense for the year ended December 31, 2021. (Round your answer to nearest whole dollar. Enter amount as a positive value.)

TABLE 2 Present Value of $1 $1 PV (1+1)" wi 1.0% 1 0.99010 2 0.98030 3 0.97059 4 0.96098 5 0.95147 1.5% 0.98522 0.97066 0.95632 0.94218 0.92826 2.0% 2.5% 0.98039 0.97561 0.96117 0.95181 0.94232 0.92860 0.92385 0.90595 0.90573 0.88385 3.0% 3.5% 4.0% 0.97087 0.96618 0.96154 0.94260 0.93351 0.92456 0.91514 0.90194 0.88900 0.88849 0.87144 0.85480 0.86261 0.84197 0.82193 4.5% 0.95694 0.91573 0.87630 0.83856 0.80245 5.0% 5.5% 6.0% 0.95238 0.94787 0.94340 0.90703 0.89845 0.89000 0.86384 0.85161 0.83962 0.82270 0.80722 0.79209 0.78353 0.76513 0.74726 7.0% 8.0% 0.0% 0.0% 11.0% 12.0% 20.0% 0.93458 0.92593 0.91743 0.90909 0.90090 0.89286 0.83333 0.87344 0.85734 0.84168 0.82645 0.81162 0.79719 0.69444 0.81630 0.79383 0.77218 0.75131 0.73119 0.71178 0.57870 0.76290 0.73503 0.70843 0.68301 0.65873 0.63552 0.48225 0.71299 0.68058 0.64993 0.62092 0.59345 0.56743 0.40188 6 0.94205 0.91454 0.88797 0.86230 0.83748 0.81350 0.79031 0.76790 0.74622 0.72525 0.70496 0.66634 0.63017 0.59627 0.56447 0.53464 0.50663 0.33490 7 0.93272 0.90103 0.87056 0.84127 0.81309 0.78599 0.75992 0.73483 0.71068 0.68744 0.66506 0.62275 0.58349 0.54703 0.51316 0.48166 0.45235 0.27908 8 0.92348 0.88771 0.85349 0.82075 0.78941 0.75941 0.73069 0.70319 0.67684 0.65160 0.62741 0.58201 0.54027 0.50187 0.46651 0.43393 0.40388 0.23257 9 0.91434 0.87459 0.83676 0.80073 0.76642 0.73373 0.70259 0.67290 0.64461 0.61763 0.59190 0.54393 0.50025 0.46043 0.42410 0.39092 0.36061 0.19381 10 0.90529 0.86167 0.82035 0.78120 0.74409 0.70892 0.67556 0.64393 0.61391 0.58543 0.55839 0.50835 0.46319 0.42241 0.38554 0.35218 0.32197 0.16151 11 12 13 14 15 0.89632 0.84893 0.80426 0.88745 0.83639 0.78849 0.87866 0.82403 0.77303 0.86996 0.81185 0.75788 0.86135 0.79985 0.74301 0.76214 0.72242 0.68495 0.74356 0.70138 0.66178 0.72542 0.68095 0.63940 0.70773 0.66112 0.61778 0.69047 0.64186 0.59689 0.64958 0.62460 0.60057 0.57748 0.55526 0.61620 0.58468 0.55491 0.52679 0.47509 0.42888 0.58966 0.55684 0.52598 0.49697 0.44401 0.39711 0.56427 0.53032 0.49856 0.46884 0.41496 0.36770 0.53997 0.50507 0.47257 0.44230 0.38782 0.34046 0.51672 0.48102 0.44793 0.41727 0.36245 0.31524 0.38753 0.35553 0.32618 0.29925 0.27454 0.35049 0.31728 0.28748 0.31863 0.28584 0.25668 0.28966 0.25751 0.22917 0.26333 0.23199 0.20462 0.23939 0.20900 0.18270 0.13459 0.11216 0.09346 0.07789 0.06491 16 0.85282 0.78803 0.72845 0.67362 0.62317 0.57671 0.53391 0.494470.45811 0.42458 0.39365 0.33873 0.29189 0.25187 0.21763 0.18829 0.16312 0.05409 17 0.84438 0.77639 0.71416 0.65720 0.60502 0.55720 0.51337 0.47318 0.43630 0.40245 0.37136 0.31657 0_27027 0.23107 0.19784 0.16963 0.14564 0.04507 18 0.83602 0.76491 0.70016 0.64117 0.58739 0.53836 0.49363 0.452800.41552 0.38147 0.35034 0.29586 0.25025 0.21199 0.17986 0.15282 0.13004 0.03756 19 0.82774 0.75361 0.68643 0.62553 0.57029 0.52016 0.47464 0.43330 0.39573 0.36158 0.33051 0.27651 0.23171 0.19449 0.16351 0.13768 0.11611 0.03130 20 0.81954 0.74247 0.67297 0.61027 0.55368 0.50257 0.45639 0.41464 0.37689 0.34273 0.31180 0.25842 0.21455 0.17843 0.14864 0.12403 0.10367 0.02608 21 0.81143 0.73150 0.65978 0.59539 0.53755 0.48557 24 0.78757 0.69954 0.62172 0.55288 0.49193 0.43796 25 0.77977 0.68921 0.609530.53939 0.47761 0.42315 28 0.75684 0.65910 0.57437 0.50088 0.43708 0.38165 29 0.74934 0.64936 0.56311 0.48866 0.42435 0.36875 0.43883 0.39679 0.35894 0.32486 0.29416 0.24151 0.19866 0.16370 0.39012 0.34770 0.31007 0.27666 0.24698 0.19715 0.15770 0.12640 0.37512 0.33273 0.29530 0.26223 0.233000 .18425 0.14602 0.11597 0.33348 0.29157 0.255090.22332 0.19563 0.15040 0.11591 0.08955 0.32065 0.27902 0.24295 0.21168 0.18456 0.14056 0.10733 0.08215 0.13513 0.11174 0.09256 0.02174 0.10153 0.08170 0.06588 0.01258 0.09230 0.07361 0.05882 0.01048 0.06934 0.05382 0.04187 0.00607 0.06304 0.04849 0.03738 0.00506 30 0.74192 0.63976 0.55207 0.47674 31 0.73458 0.63031 0.54125 0.46511 40 0.67165 0.55126 0.45289 0.37243 0.41199 0.39999 0.30656 0.35628 0.30832 0.26700 0.34423 0.29646 0.25550 0.25257 0.20829 0.17193 0.23138 0.22036 0.14205 0.20064 0.17411 0.13137 0.09938 0.07537 0.05731 0.04368 0.03338 0.00421 0.19018 0.16425 0.12277 0.09202 0.06915 0.05210 0.03935 0.02980 0.00351 0.11746 0.09722 0.06678 0.04603 0.03184 0.02209 0.01538 0.01075 0.00068

Answer 1

Parta: calculation of interest expense for the bonds issued Face value of the bond = $20,000,000 Semi annual interest on bond = $ 2,000,000 x 11% x 1/2 = $110,000 Particulars Amount $ 1,655,093 Present Value of Semiannual interest of $110,000 for 20 years is ( 110,000 x 15.04630 PVA of $1, cumulative factor of 40 periods at 6%}) $ 194,440 Present value of a bond at the Maturity date [2,000,000 x 0.09722(PV factor in table 2 at the end of 40th period at 6%}] Total present value $ 1,849,533 Bonds are issued at a discount when Market Interest Rate is more than the bond interest rate here the bonds are issued at a discount to yield 12%. Therefore bond discount will be amortized during the life of thebond by effective interest method Unamortized Bond Discount is calculated asunder: $2,000,000 Face Value of Bonds Less Purchase price of Bonds Unamortized Bond Discount $1,849,533 $ 150,467

Table showing the amortization of Bond Discount andInterest payment is shown as below: Semiannual/Carrying Interest Period Semiannua Unamortiz Semiannual 1 Interest Amortizatio ed Bond Carrying Value at Interest Expense at n of Bond Discount at Value at end beginning payment to Discount end of of period bondholders berecorded Period 12% to of period 6% of A 5.5% of 2,000,000 (B-C) (E-D) (A+D) $150,467 $1,849,533 149,495 1,850,505 1 1,849,533 $110,972 $110,000 $972 Therefore, the interest expense for december 31,2021 is $110,972 Part b: Calculation of interest on Note payable Interest upto june 30 = (530,000 +75,000 ] x 10% x 1/2 = $30,250 Interest from jun to dec 31 = 530,000 x 10%x1/2 = $26,500 Interest on Note payable as on dec 31,2020 = $ 30,250 +26,500 = $56,750

Partc: Present value of lease payable = $40,000 x 3.48685 ( table 6 - PVAD for 4 payments at 10% ] = $139,474 Interest expense = ( 139,474-40,000] x 10% = $9,947 Interest expense for the year ended December 31, 2020 Bonds payable $ 110,972 Note payable $ 56,750 Lease payable $ 9,947 Total interest expense $ 177,669