Question

The fiscal year ends December 31 for Lake Hamilton Development. To provide funding for its Moonlight Bay project. LHD issued 9% bonds with a face amount of $610,000 on November 1, 2018. The bonds sold for $557,668, a price to yield the market rate of 10%. The bonds mature October 31, 2038 (20 years). Interest is paid semiannually on April 30 and October 31 and is determined using the effective interest method Required: 1. What amount of interest expense related to the bonds will LHD report in its income statement for the year ending December 31, 2018? 2. What amount(s) related to the bonds will LHD report in its balance sheet at December 31, 2018? 3. What amount of interest expense related to the bonds will LHD report in its income statement for the year ending December 31, 2019? 4. What amount(s) related to the bonds will LHD report in its balance sheet at December 31, 2019? For all requirements, Do not round your intermediate calculation. Enter your answer in whole dollars.) 1. Interest expense 2. Bonds payable Interest payable 3. Interest expense 4. Bonds payable Interest payable

Answer 1

Lake Hamilton Development Schedule of Bond discount Amortization Effective-Interest Method Interest expense Calculation Discount amortized Carrying Amt Interest expense Discount amortized Carrying Amt 10% Date Cash paid 9% 1-Nov-18 30-Apr-19 27,450.00 31-Oct-19 27,450.00 30-Apr-20 27,450.00 Calc 610,000*9%*6/12 27,883.40 27,905.07 27,927.82 433.40 455.07 477.82 557,668.00 558,101.40 558,556.47 559,034.29 557,668*10%*6/12 27,883.40-27,450 558, 101.40*10%*6/12 27,905.07-27,450 558,556.47*10%*6/12 27,927.82-27,450 Carrying amt*10%*6/12 Int exp less Cash paid 557,668+433.40 558,101.40+455.07 558,556.47+477.82 Carrying amt plus Discount amortized Calculation =27,883.40/6*2 Workings below 1 Interest expense 2 Bonds Payable Interest Payable 3 Interest expense 4 Bonds Payable Interest Payable Year 2018 2018 2018 2019 2019 2019 Solution 9,294 557,812 9,294 55,803 558,716 9,309 = (27,883.40/6*4)+27,905.07+(27,927.82/6*2) Workings below =27,927.82/6*2

2018 Explanation Interest expense From Nov 2018 to Apr 2019 for 6 months, interest expense is 27,883.40, so calculate for 2 months of Nov-Dec 2018 Interest expense From Nov 2018 to Apr 2019 for 6 months, interest expense is 27,883.40, so calculate for 4 months of Jan-Apr 2019 Plus May to Oct 2019 interest expense of 27,905.07 Plus From Nov 2019 to Apr 2020 for 6 months, interest expense is 27,927.82, so calculate for 2 months of Nov Dec 2019 - which is also interest payable figure 2019 Workings Req 2 & 4 Face value Issue price Unamortized Discount Discount amortized Unamortized Discount Discount amortized Unamortized Discount 1-Nov-18 1-Nov-18 1-Nov-18 31-Dec-18 31-Dec-18 31-Dec-19 31-Dec-19 610,000 557,668 52,332 144 52,188 903 51,284 =610,000-557,668 -433.40/6*2 =(433.40/6*4) +455.07+(477.82/6*2) Bonds Payable Unamortized Discount Bonds Payable, Net 2018 2018 2018 610,000 (52,188) 557,812 2019 Bonds Payable Unamortized Discount Bonds Payable, Net 2019 2019 610,000 (51,284) 558,716