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 S1. PVA of S1, 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 $2,500,000. The bonds mature in 20 years and interest of 9% 2. At December 31, 2017, Moonlight Bay had a 10% installment note payable to Third Mercantile Bank with a balance of $550,000 3. On January 1, 2018, Moonlight Bay leased a building under a finance lease calling for four annual lease payments of $50,000 : 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. The annual payment is $85,000, payable each June 30. beginning January 1, 2018. Moonlight Bay's incremental borrowing rate on the date of the lease was 13% and the lessor's implicit rate, which was known by Moonlight Bay, was 12%. Required Calculate interest expense for the year ended December 31, 2018. (Round your answer to nearest whole dollar.) Interest expense

Answer 1

Answer:-

Given ,bonds issued at a price to yield investors 10%.

Let "x" be the value of bonds purchased. Then interest yield = 10% of x = 0.1x

(1 jan to 30 jun)

$ 25,00,000 × 9% ×6/12 = $ 1,12,500 (6 months)

(1 jul to 31 dec)

( $ 25,00,000 +$ 1,17,562.5) × 9% ×6/12 = $ 1,17,562.50

# interest in a year = $ 112,500 + $ 117,562.50 = $ 230,062.50

$ 230,062.50 is equal to 10% interest yield to investor.

I.e 0.1x = $ 230,062.50

x = $ 230,062.50 ÷ 0.1

= $ 23,00,625.

# then bonds should be issued at discount i.e less than facevalue $ 2,300,625.

Rate of effective interest = interest amount /face value of investment = $ 230,062.5 ÷ $ 25,00,000 = 9.20%

Bonds issued on jul 1,2018.

Then interest from jul 1 to 31 december = 9.2% of $ 25,00,000 ×6/12 = $ 1,15,000.

# interest on bonds for the year 31 December 2018 = $ 115,000

(2) Given,

Notes payable balance = $ 550,000 taken on 31 december 2017.

Installment amount = $ 85,000.

$ 85,000 is inclusive of both interest from 31 december 2017 to 30 jun 2018 and principal.

Rate of interest = 10%.

Calculation of interest portion :-

$ 550,000 × 10%× 6/12 = $ 27,500.

Principal amount = $ 85,000 - $ 27,500 = $ 57,500.

Outstanding principal balance as on 1 jul 2018 = $ 550,000 - $ 57,500 = $ 492,500.

Calculation of interest accrued upto 31 december 2018 = $492,500×10%×6/12 = $ 24,625.

# total interest expenditure on notes payable for the year $ 27,500 + $ 24,625 = $ 52,125.

(3) annual installment = $50,000. Implicit interest rate = 12%.

PVOA = installment ×pvaf(i,n)

PVOA = $ 50,000 × pvaf(12%,4)

PVOA = $ 50,000 × 3.037349

PVOA = $ 151,867.45

CASH PRICE OF BUILDING = $ 151,867.45

Outstanding balance as on 31 december 2018 =$ 151,867.45

Interest rate = 12%

Then interest wrt finance lease =12% of $ 151,867.45 = $ 18,224.094

Interest expense for the year ended 31 december 2018 =

(1) + (2) + (3) = $ 115,000 + $ 52,125 + $ 18,224 = $ 185,349

# Total interest expense for the year ending 31 december 2018 $ 185,349.