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: (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.) 1. On July 1, 2018, Moonlight Bay issued bonds with a face amount of $1,700,000. The bonds mature in 15 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. 2. At December 31, 2017, Moonlight Bay had a 10% installment note payable to Third Mercantile Bank with a balance of $640,000. The annual payment is $130,000, payable each June 30. 3. On January 1, 2018, Moonlight Bay leased a building under a finance lease calling for four annual lease payments of $55,000 beginning January 1, 2018. Moonlight Bay's incremental borrowing rate on the date of the lease was 12% and the lessor's implicit rate, which was known by Moonlight Bay, was 11%. Required: Calculate interest expense for the year ended December 31, 2018. (Round your answer to nearest whole dollar.)

Answer 1

Answer:

1) Bond Payable
Face Value (FV)	$1700000
Nper = 15 years x 2	30
Coupon Rate = 11%/2	5.5%
PMT = FV x Coupon Rate	$93500
Rate =12%/2	6%
Present Value of Bonds payable = PV(6%,30,-$93500,-1700000)	$1582998.94
Interest Expenses = $1582998.94 x 12%/2	$94979.94
Using Table calculate Present Value
PMT= $93500x PVA(30,6%)=$93500x 13.7648	$1287009
Principal = $1700000x PV (30,6%) = $1700000 x 0.17411	$295987
Present Value of Bonds payable =	$1582996
2) Note Payable
Annual Payment (PMT)	$130000
Balance (PV)	$640000
Rate	10.00%
Interest Expense on June 30,2018 = $640000 x 10% x 1/2	$32000
Interest Expense on Dec 31,2018 = $640000-(130000-$32000- $32000) x10% x 1/2	$28700
Interest Expenses	$60700
Working Note
Interest exp on Dec 2019 and june 2018 = $640000 x 10% x1/2 = $32000 each
3) Capital Lease
Annual Lease Payment (PMT)	$55000
Nper	4
Rate	11%
Present Value of Annuity due (PV(11%,4,-55000,0,1)	$189404.31
Interest Expense = ($189404.31- $55000)x 11%	$14784.47
using Table Present value of lease = $55000 x (PVA due 11%,4); $55,000 x 3.1024	$170632
Interest expense for the year ended December 31, 2018.
Bonds Payable	$94979.94
Notes Payable	$60700
Capital Lease	$14784.47
Total Interest Expense	$170464.41