Question

The fiscal year ends December 31 for Lake Hamilton Development. To provide funding for its Moonlight Bay project, LHD issued 7% bonds with a face amount of $700,000 on November 1, 2021. The bonds sold for $630,726, a price to yield the market rate of 8%. The bonds mature October 31, 2041 (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, 2021?

2. What amount(s) related to the bonds will LHD report in its balance sheet at December 31, 2021?

3. What amount of interest expense related to the bonds will LHD report in its income statement for the year ending December 31, 2022?

4. What amount(s) related to the bonds will LHD report in its balance sheet at December 31, 2022? (For all requirements, do not round your intermediate calculations. Enter your answers in whole dollars.)

Answer 1

1. Amount of Interest expense related to the bonds for the year ending December 31, 2021:

The bonds sold for $630,726

Interest rate = 8%

Period for which interest is to be calculated = 2 Months (November and December 2020)

Interest = 630,726*8% = $50458.08 (12 months)

= 50458.08/12 = $4204.84 (1 Month)

= 4204.84*2 = $8409.68 (2 Months)

So the amount of Interest expense related to bonds for the year ending December 31, 2021 (i.e.2 months) = $8409.68

2. Amount related to Bonds in the Balance Sheet at December 31, 2021 :

INTEREST PAYABLE:

Interest is paid semiaanually on April 30 and Oct 31

Interest = 700000*7%/2 = 24500/6 = 4083.33*2 = $8166.67

BONDS PAYABLE :

Discounted Amount as calculated below in the table for Apr 30, 2022 = 729

=729/6 = 121.5*2 = 243

Bonds Payable = 630726 (at the end of the Oct 31, 2021) +243 = $630969

So in the Balance Sheet at December 31, 2021, following will be reported:

Bonds Payable = $ 630,969

Interest Payable = $8166.67

3. Interest Expense at the end of December 31, 2022

Interest calculations are shown below in the table.

Interest = 25229/6*4 = $16819 (Rounded off) (4 months)

Interest = $25258 (6 months)

Interest = 25289/6*2 = $8430 (2 months)

Total Interest for calender year 2022 ending in December 21 = 16819+25258+8430 = $50507

4. Amount related to Bonds in the Balance Sheet at December 31, 2022

INTEREST PAYABLE:

Interest is paid semiaanually on April 30 and Oct 31

Interest = 700000*7%/2 = 24500/6 = 4083.33*2 = $8166.67

BONDS PAYABLE :

Discounted Amount as calculated below in the table for Apr 30, 2023 = 789

=729/6 = 131.5*2 = 263

Bonds Payable = 632213 (at the end of Oct 31, 2022) +263 = $632476

So in the Balance Sheet at December 31, 2021, following will be reported:

Bonds Payable = $ 632,476

Interest Payable = $8166.67

NOTES :

	700,000*7%/2	carrying amount*8%/2	Interest- Cash Paid	Carrying amt+ discount amt
Year	Cash paid	Interest	Discaount Amount	Carrying value
Nov 1, 2021				630726
Apr 30, 2022	24500	25229	729	631455
Oct 31, 2022	24500	25258	758	632213
Apr 30, 2023	24500	25289	789	633002
Oct 31, 2023	24500	25320	820	633822