Question
In: Accounting
On Jan 1, 2018, the North Sea Company purchased a highsea platform for $ 12,000,000 and...
On Jan 1, 2018, the North Sea Company purchased a highsea platform for $ 12,000,000 and paid $2,000,000 as a downpyament while the balance will be paid over the next 10 years in installments of $500,000 every six months , starting July 1, 2018. The market rate on Jan 1, 2018 was 6%.
Requirements:
a. For the how much the North Sea Company should
recognize the platform on Jan 1, 2018? Show your calculation.
b. On Jan 1, 2025, the company will pay installment
payment of $500,000. How much of this payment represents a payment
of the principal and how much of it represents a payment of the
interest? Show your calculation (fill in the following table Jan 1
2018 – Jan 2025).
Date Cash Paid Interest Exp. P
Payment Carrying Value
1-Jan-18 $ - $
- $ - $ ………….
1-Jul-18
1-Jan-19
1-Jul-19
1-Jan-20
1-Jul-20
1-Jan-21
1-Jul-21
1-Jan-22
1-Jul-22
1-Jan-23
1-Jul-23
1-Jan-24
1-Jul-24
1-Jan-25
c. What is the total interest expense for the year ended on Dec 31, 2021?
d. What will be the carrying value of the notes on Dec
31, 2024?
Solutions
Expert Solution
| a | North Sea Company should recognise the Platform at $94,38,737 on Jan 1, 2018 calculated as under. | |||
| No. of period |
Payments (Cash flows) |
Present Value Factor @6/2=3%p.a. | Discounted Cash flows/ Present value | |
| 1 | $ 500,000 | 0.97087 | $ 485,437 | |
| 2 | $ 500,000 | 0.94260 | $ 471,298 | |
| 3 | $ 500,000 | 0.91514 | $ 457,571 | |
| 4 | $ 500,000 | 0.88849 | $ 444,244 | |
| 5 | $ 500,000 | 0.86261 | $ 431,304 | |
| 6 | $ 500,000 | 0.83748 | $ 418,742 | |
| 7 | $ 500,000 | 0.81309 | $ 406,546 | |
| 8 | $ 500,000 | 0.78941 | $ 394,705 | |
| 9 | $ 500,000 | 0.76642 | $ 383,208 | |
| 10 | $ 500,000 | 0.74409 | $ 372,047 | |
| 11 | $ 500,000 | 0.72242 | $ 361,211 | |
| 12 | $ 500,000 | 0.70138 | $ 350,690 | |
| 13 | $ 500,000 | 0.68095 | $ 340,476 | |
| 14 | $ 500,000 | 0.66112 | $ 330,559 | |
| 15 | $ 500,000 | 0.64186 | $ 320,931 | |
| 16 | $ 500,000 | 0.62317 | $ 311,583 | |
| 17 | $ 500,000 | 0.60502 | $ 302,508 | |
| 18 | $ 500,000 | 0.58739 | $ 293,697 | |
| 19 | $ 500,000 | 0.57029 | $ 285,143 | |
| 20 | $ 500,000 | 0.55368 | $ 276,838 | |
| Total | $ 10,000,000 | $ 7,438,737 | ||
| +Down payment | $ 2,000,000 | |||
| Platform to be recognised on Jan 1,2018 | $ 9,438,737 | |||
| b | Loan amortisation schedule | |||
| Date | Installment Payments | Interest on Platform | Recovery of Principal | Platform Carrying value |
| 01-01-18 | $ 2,000,000 | $ - | $ 2,000,000 | $ 7,438,737 |
| 01-07-18 | $ 500,000 | $ 223,162 | $ 276,838 | $ 7,161,900 |
| 01-01-19 | $ 500,000 | $ 214,857 | $ 285,143 | $ 6,876,757 |
| 01-07-19 | $ 500,000 | $ 206,303 | $ 293,697 | $ 6,583,059 |
| 01-01-20 | $ 500,000 | $ 197,492 | $ 302,508 | $ 6,280,551 |
| 01-07-20 | $ 500,000 | $ 188,417 | $ 311,583 | $ 5,968,968 |
| 01-01-21 | $ 500,000 | $ 179,069 | $ 320,931 | $ 5,648,037 |
| 01-07-21 | $ 500,000 | $ 169,441 | $ 330,559 | $ 5,317,478 |
| 01-01-22 | $ 500,000 | $ 159,524 | $ 340,476 | $ 4,977,002 |
| 01-07-22 | $ 500,000 | $ 149,310 | $ 350,690 | $ 4,626,312 |
| 01-01-23 | $ 500,000 | $ 138,789 | $ 361,211 | $ 4,265,101 |
| 01-07-23 | $ 500,000 | $ 127,953 | $ 372,047 | $ 3,893,054 |
| 01-01-24 | $ 500,000 | $ 116,792 | $ 383,208 | $ 3,509,846 |
| 01-07-24 | $ 500,000 | $ 105,295 | $ 394,705 | $ 3,115,141 |
| 01-01-25 | $ 500,000 | $ 93,454 | $ 406,546 | $ 2,708,596 |
| 01-07-25 | $ 500,000 | $ 81,258 | $ 418,742 | $ 2,289,854 |
| 01-01-26 | $ 500,000 | $ 68,696 | $ 431,304 | $ 1,858,549 |
| 01-07-26 | $ 500,000 | $ 55,756 | $ 444,244 | $ 1,414,306 |
| 01-01-27 | $ 500,000 | $ 42,429 | $ 457,571 | $ 956,735 |
| 01-07-27 | $ 500,000 | $ 28,702 | $ 471,298 | $ 485,437 |
| 01-01-28 | $ 500,000 | $ 14,563 | $ 485,437 |
$ &n
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