Question

The fiscal year ends December 31 for Lake Hamilton Development. To provide funding for its Moonlight Bay project, LHD issued 5% bonds with a face amount of $590,000 on November 1, 2018. The bonds sold for $521,813, a price to yield the market rate of 6%. 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	$5218
2	Bonds Payable	$522114
	Interest Payable	??? (not 5218)
3	Interest Expense	$31354
4	Bonds Payable	$523969
	Interest Payable	??? (not 5236)

Answer 1

1. Interest expense to be shown in income statement as on 31/12/2018 (for 2months 1/11/18 to 31/12/2018)

521813*6%*1/2*2/6 = $ 5218.

2.Bonds payable as on 31/12/2018 ( Note 1) = $ 522,114

3. Interest expense to be shown in income statement as on 31/12/2019 (Note 2) : $ 31,354

4.Bonds payable as on 31/12/2018 ( Note 3) : $ 523,969.

Interest Payable amount as on 31/12/2018 & 31/12/2019 should be( $ 590,000 * 5% *1/2* 2/6) = $ 4917.

Working Notes:

Note 1:

a)

Interest Expense as on 31/12/2018 = 521813*3%*2/6	5218
Interest expense to be paid = 590000*2.5%*2/6	4917
Difference to be charged to bonds payable	301

b)

Bonds payable as on 31/10/2018	521813
Add: Difference in interest ( from a))	301
Bonds payable as on 31/12/2018	522114

Note 2 & 3:

Interest expense from 01/01/2019 to 31/12/2019 includes the following 3 components:(calculation shown below)

1/1/2019 to 30/4/2019 = 10436

1/5/19 to 31/10/2019 = 15682

1/11/19 to 31/12/2019 = 5236

Total = 31,354.

Interest expense from 01/01/2019 to 30/4/2019 = 521813*3%*4/6	10436
Interest expense to be paid = 590000*2.5%*4/6	9833
Difference to be charged to bonds payable	603
Interest expense from 1/5/19 to 30/10/2019 ( 522114+603)*3%	15682
Interest expense to be paid ( 590000*2.5%)	14750
Difference to be charged to bonds payable	932
Interest expense from 1/11/2019 to 31/12/2019 (522114+603+932)*6%*1/2*2/6	5236
Interest expense to be paid = 590000*2.5%*2/6	4917
Difference to be charged to bonds payable	320
Outstanding Bond Balance as on 31/12/2018	522114
Add: Interest differnce from 1/1/19 to 30/4/19	603
Add: Interest differnce from 1/5/19 to 31/10/19	932
Add: Interest differnce from 1/11/19 to 30/12/19	320
Total Bonds Payable as on 31/12/2019	523969