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+i)" n/i 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 20.0% 0.97561 0.97087 0.96618 0.91743 0.99010 0.98522 0.98039 0.96154 0.95694 0.95238 0.94787 0.94340 0.93458 0.92593 0.90909 0.90090 0.89286 0.83333 0.90703 0.89000 0.87344 0.84168 2 0.98030 0.97066 0.96117 0.95181 0.94260 0.93351 0.92456 0.91573 0.89845 0.85734 0.82645 0.81162 0.79719 0.69444 3 0.86384 0.85161 0.83962 0.81630 0.97059 0.95632 0.94232 0.92860 0.91514 0.90194 0.88900 0.87630 0.79383 0.77218 0.75131 0.73119 0.71178 0.57870 4 0.96098 0.94218 0.92385 0.90595 0.88849 0.87144 0.85480 0.83856 0.82270 0.80722 0.79209 0.76290 0.73503 0.70843 0.68301 0.65873 0.63552 0.48225 5 0.95147 0.40188 0.92826 0.90573 0.88385 0.86261 0.84197 0.82193 0.80245 0.78353 0.76513 0.74726 0.71299 0.68058 0.64993 0.62092 0.59345 0.56743 6 0.94205 0.91454 0.88797 0.86230 0.79031 0.53464 0.83748 0.81350 0.76790 0.74622 0.72525 0.70496 0.66634 0.63017 0.59627 0.56447 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 0.40388 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 0.23257 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 0.68495 0.64958 0.61620 0.58468 0.55491 0.89632 0.84893 0.42888 0.38753 11 0.80426 0.76214 0.72242 0.52679 0.47509 0.35049 0.31728 0.28748 0.13459 12 0.88745 0.83639 0.78849 0.74356 0.70138 0.66178 0.62460 0.58966 0.55684 0.52598 0.49697 0.44401 0.39711 0.35553 0.31863 0.28584 0.25668 0.11216 13 0.87866 0.82403 0.77303 0.72542 0.68095 0.63940 0.60057 0.56427 0.53032 0.49856 0.46884 0.41496 0.36770 0.32618 0.28966 0.25751 0.22917 0.09346 14 0.86996 0.81185 0.75788 0.70773 0.66112 0.61778 0.57748 0.53997 0.50507 0.47257 0.44230 0.38782 0.34046 0.29925 0.26333 0.23199 0.20462 0.07789 15 0.86135 0.79985 0.74301 0.69047 0.64186 0.59689 0.55526 0.51672 0.48102 0.44793 0.41727 0.36245 0.31524 0.27454 0.23939 0.20900 0.18270 0.06491 0.78803 0.57671 0.42458 0.39365 0.29189 0.25187 0.05409 16 0.85282 0.72845 0.67362 0.62317 0.53391 0.49447 0.45811 0.33873 0.21763 0.18829 0.16312 0.27027 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 0.23107 0.19784 0.16963 0.14564 0.04507 0.53836 0.49363 0.45280 0.41552 0.38147 0.35034 18 0.83602 0.76491 0.70016 0.64117 0.58739 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 0.67297 0.61027 0.55368 0.50257 0.45639 0.41464 0.37689 0.34273 0.02608 20 0.81954 0,74247 0.31180 0.25842 0.21455 0.17843 0.14864 0.12403 0.10367 0.81143 0.65978 0.39679 0.35894 0.02174 21 0.73150 0.59539 0.53755 0.48557 0.43883 0.32486 0.29416 0.24151 0.19866 0.16370 0.13513 0.11174 0.09256 0.43796 0.39012 0.10153 24 0.78757 0.69954 0.62172 0.55288 0.49193 0.34770 0.31007 0.27666 0.24698 0.19715 0.15770 0.12640 0.08170 0.06588 0.01258 25 0,77977 0.68921 0.60953 0.53939 0.47761 0.42315 0.37512 0.33273 0.29530 0.26223 0.23300 0.18425 0.14602 0.11597 0.09230 0.07361 0.05882 0.01048 28 0.75684 0.65910 0.57437 0.50088 0.43708 0.38165 0.33348 0.29157 0.25509 0.22332 0.19563 0.15040 0.11591 0.08955 0.06934 0.05382 0.04187 0.00607 29 0.74934 0.64936 0.24295 0.56311 0.48866 0.42435 0.36875 0.32065 0.27902 0.21168 0.18456 0.14056 0.10733 0.08215 0.06304 0.04849 0.03738 0.00506 0.04368 30 0.74192 0.63976 0.55207 0.47674 0.41199 0.35628 0.30832 0.26700 0.23138 0.20064 0.17411 0.13137 0.09938 0.07537 0.05731 0.03338 0.00421 31 0.73458 0.63031 0.54125 0.46511 0.39999 0.34423 0.29646 0.25550 0.22036 0.19018 0.16425 0.12277 0.09202 0.06915 0.05210 0.03935 0.02980 0.00351 40 0.67165 0.55126 0.45289 0.37243 0.30656 0.25257 0.20829 0.17193 0.14205 0.11746 0.09722 0.06678 0.04603 0.03184 0.02209 0.01538 0.01075 0.00068

Answer 1

Answer -

Step - (1) - Calculation of Bonds Interest Expense -

	Particulars	Explanation	Amount ($)
I.	Present Value of Bonds Interest Payments	Face Value * (Interest rate / 2) * PVAF of $1 (i%, n) = $2000000 * (11% / 2) * $1(6%,40 years) = $2000000 * 5.5% * 15.04630 = $1655093	1655093
II.	Present Value of Face Value of Bond	Face Value * PVIF of $1 (i%, n) = $2000000 * $1(6%,40 years) = $2000000 * 0.09722 = $194440	194440
III.	Present Value of Bond	I + II	1849533
Bonds Interest Expense		($1849533 * 12%) * 1 / 2	110972

.

Step - (2) - Calculation of Interest Expense on Note payable -

	Particulars	Explanation	Amount ($)
I.	Interest expense on June 30	($530000 * 10%) * 1 / 2	26500
II.	Interest expense on December 31	[$530000 - $75000 + $26500 + $26500) * 10%] * 1 / 2	25400
Interest Expense on Note payable		I + II	51900

.

Step - (3) - Calculation of Interest Expense on finance lease -

	Particulars	Explanation	Amount ($)
I.	Present value of lease payable	Annual lease payment * PVAD of $1 (i%, n) = $40000 * $1(10%,4 years) = $40000 * 3.48685 = $139474	139474
Interest Expense		(Present value of lease payable - Annual lease payment) * 10% = ($139474 - $40000) * 10% = 9947	9947

.

Step - (4) - Calculation of Total Interest Expense for the year ended December 31, 2021

	Particulars	Explanation	Amount ($)
I.	Bonds Interest Expense	Refer step - (1)	110972
II.	Interest Expense on Note payable	Refer step - (2)	51900
III.	Interest Expense on finance lease	Refer step - (3)	9947
Total Interest Expense for the year ended December 31, 2021		I + II + III	172819