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, 2018. Your accounting group provided you the following information on the company's debt:

1. On July 1, 2018, Moonlight Bay issued bonds with a face amount of $2,000,000. The bonds mature in 20 years and interest of 9% is payable semiannually on June 30 and December 31. The bonds were issued at a price to yield investors 10%. Moonlight Bay records interest at the effective rate.

2. At December 31, 2017, Moonlight Bay had a 10% installment note payable to Third Mercantile Bank with a balance of $500,000. The annual payment is $60,000, payable each June 30.

3. On January 1, 2016, Moonlight Bay leased a building under a capital lease calling for four annual lease payments of $40,000 beginning January 1, 2018. 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, 2018.

Answer 1

Ans: Moonlight Bay Resorts

1) Present value of the Bond $1,828,409

Face value of the bond $2,000,000

Yield rate is 10%

Interest Rate 9%

Date of Payment    Interest    Present Value factor @10%   Pressent Value
1   $90,000   0.9523809524   $85,714
2   $90,000   0.9070294785   $81,633
3   $90,000   0.8638375985   $77,745
4   $90,000   0.8227024748   $74,043
5   $90,000   0.7835261665   $70,517
6   $90,000   0.7462153966   $67,159
7   $90,000   0.7106813301   $63,961
8   $90,000   0.676839362   $60,916
9   $90,000   0.6446089162   $58,015
10   $90,000   0.6139132535   $55,252
11   $90,000   0.5846792891   $52,621
12   $90,000   0.5568374182   $50,115
13   $90,000   0.5303213506   $47,729
14   $90,000   0.505067953   $45,456
15   $90,000   0.4810170981   $43,292
16   $90,000   0.458111522   $41,230
17   $90,000   0.4362966876   $39,267
18   $90,000   0.4155206549   $37,397
19   $90,000   0.395733957   $35,616
20   $90,000   0.3768894829   $33,920
21   $90,000   0.3589423646   $32,305
22   $90,000   0.3418498711   $30,766
23   $90,000   0.3255713058   $29,301
24   $90,000   0.3100679103   $27,906
25   $90,000   0.2953027717   $26,577
26   $90,000   0.281240735   $25,312
27   $90,000   0.267848319   $24,106
28   $90,000   0.2550936371   $22,958
29   $90,000   0.2429463211   $21,865
30   $90,000   0.2313774487   $20,824
31   $90,000   0.2203594749   $19,832
32   $90,000   0.2098661666   $18,888
33   $90,000   0.1998725396   $17,989
34   $90,000   0.1903547996   $17,132
35   $90,000   0.1812902854   $16,316
36   $90,000   0.1726574146   $15,539
37   $90,000   0.164435633   $14,799
38   $90,000   0.1566053647   $14,094
39   $90,000   0.1491479664   $13,423
40   $90,000   0.1420456823   $12,784
40   $2,000,000 0.1420456823   $284,091.36
   Present value    $1,828,409

Interest on bond for 31.12.2018 = $1,828,409*(1+0.05)

   =$91,420

2) 10% installment note payable

Annual payment is $60,000, payable each June 30

At December 31, 2017 balance of $500,000

Interest payable up to 30June2018 is $25,000($500,000*(0.10*(6/12)))

Interest due up to 31Dec.2018 is $22,000($440,000*(0.10*(6/12)))

3) On January 1, 2016, Moonlight Bay leased a building under a capital lease calling for four annual lease payments of $40,000 beginning January 1, 2018

Incremental borrowing rate on the date of the lease was 11%

lessor’s implicit rate, which was known by Moonlight Bay, was 10%

Date	Lease Payment	Present value Factor	Present Value
01.01.2018	$40,000	1.000	$40,000
01.01.2019	$40,000	0.901	$36,036
01.01.2020	$40,000	0.812	$32,465
01.01.2021	$40,000	0.731	$29,248
			$137,749

Interest for the year 2018 is $10,752

Date	Cash payment	Interest	Increase in carrying Amount	Carrying Amount
01.01.2018	$40,000			$97,749
01.01.2019	$40,000	$10,752	-$29,248	$68,501
01.01.2020	$40,000	$7,535	-$32,465	$36,036
01.01.2021	$40,000	$3,964	-$36,036	0

So total Interest Payment for the year 2018 is $149,172