You are the new controller for Moonlight Bay Resorts. The company CFO has asked
ID: 2415040 • Letter: Y
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, 2016. 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, 2016, Moonlight Bay issued bonds with a face amount of $1,500,000. The bonds mature in 15 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, 2015, Moonlight Bay had a 10% installment note payable to Third Mercantile Bank with a balance of $620,000. The annual payment is $120,000, payable each June 30.
On January 1, 2016, Moonlight Bay leased a building under a capital lease calling for four annual lease payments of $45,000 beginning January 1, 2016. Moonlight Bay’s incremental borrowing rate on the date of the lease was 10% and the lessor’s implicit rate, which was known by Moonlight Bay, was 9%.
Calculate interest expense for the year ended December 31, 2016.
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, 2016. 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.)
Explanation / Answer
Interest expense for the year ended December 31,2016 is calculated as under:
1.
For calculating the amount which Moonlight will receive by issuing ($1,500,000 bond issue with semi-annual interest of $82,500 and due in 15 years) present value of interest payment and present value of single payment at maturity date is required.
Particulars
Amount
Present Value of Semiannual interest of $82,500 for 15 years is
$1,135,613
(82,500*13.765(Cumulative factor of 30 periods at 6%)
Present value of a single payment at the Maturity date
$ 1,500,000 *.174(Factor at end of 30th period at 6%)
$261,000
$1,396,613
Bonds are issued at a discount when Market Interest Rate is more than the Face rate.Here bonds are issued at 12% market rate therefore bond discount will be amortized during the life of the bond by effective method
Unamortized Bond Discount is calculated as under:
Particulars
Amount
Purchase price of Bonds
$1,396,613
Less:
Face Value of Bonds
$1,500,000
Unamortized Bond Discount
$103,387
Table showing the amortization of Bond Discount and Interest payment is shown as below:
A
B
C
D
E
F
Semiannual Interest Period
Carrying Value at beginning of period
Semiannual Interest Expense at 12% to be recorded
Semiannual Interest payment to bondholders
Amortization of Bond Discount
Unamortized Bond Discount at end of Period
Carrying Value at end of period
6% of A
5.5% of 1,500,000
(B-C)
(E-D)
(A+D)
0
$103,387
$1,396,613
1
1,396,613
$83,797
$82,500
$1,297
102,090
1,397,910
So the interest expense for December 31, 2016 is $83,797
2.
Interest expense on Note Payable for December 31, 2016 is calculated as under:
$620,000*10%*.05= $31,000
($620,000- $120,000)*10%*.05= $25,000
So, the interest expense is $56,000
3.
Particulars
Amount
Present value of annual lease payments
$ 45,000*1+ ($45,000*2.531)
$158,895
$158,895
Interest expense is 10% of PV of lease which is $15,890.
Particulars
Amount
Present Value of Semiannual interest of $82,500 for 15 years is
$1,135,613
(82,500*13.765(Cumulative factor of 30 periods at 6%)
Present value of a single payment at the Maturity date
$ 1,500,000 *.174(Factor at end of 30th period at 6%)
$261,000
$1,396,613
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