Problem 14-8 Bonds; effective interest; partial period interest; financial state
ID: 2335344 • Letter: P
Question
Problem 14-8 Bonds; effective interest; partial period interest; financial statement effects [L014-2] 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 $630,000 on November 1, 2018. The bonds sold for $567,653, a price to yield the market rate of 8%. 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 2. Bonds payable Interest payable 3. Interest expense Bonds payable Interest payableExplanation / Answer
Lake Hamilton Development
1
Interest expense
$7,569
2
Bonds Payable
$567,872
Interest payable
$7,350
3
Interest expense
$45,429
4
Bonds Payable
$569,201
Interest payable
$44,100
Interest expense is $7,569
Calculations –
Bond sale value = $567,653
Market rate = 8%
Interest is paid semi-annually
Bonds issued on Nov 1, 2018
Interest expense to be reported on income statement ending Dec 31, 2018 is calculated as follows,
Semi-annual interest expense = $567,653 x 8% x 6/12 months = $22,706
Interest expense for the two months Nov and Dec = $22,706 x 2/6 = $7,569
Bonds Payable$567,872
Interest Payable$7,350
Calculations –
Partial Balance Sheet at December 31, 2018
Liabilities
Bonds Payable (face value)
$630,000
Less: Discount
($62,347)
Initial Balance, Nov 1, 2018
$567,653
Dec 31, 2018 Discount amortization
$219
Balance at Dec 31, 2018
$567,872
Bonds Payable$567,872
Interest Payable$7,350
Semi-annual Interest payable = $630,000 x 7% x 6/12 = $22,050
Interest for two months, Nov and Dec = $22,050 x 2/6 = $7,350
Discount amortization =interest expense – interest payable
= 7,569 - $7,350 = $219
Interest expense, April 30, 2019 = ($567,653 x 8% x 6/12) x 4/6 months = $15,137
Interest payable, April 30, 2019 = ($630,000 x 7% x 6/12) x 4/6 months = $14,700
Discount amortization = 15,137 - $14,700 = $437
Interest expense, Oct 31, 2019 = ($567,653 x 8% x 6/12) = $22,706
Interest payable, Oct 31, 2019 = ($630,000 x 7% x 6/12) = $22,050
Discount amortization = $22,706 - $22,050 = $656
Total discount amortization = $437 + $656 = $1,093
Interest expense, Nov 1 - Dec 31, 2019 –
Book value of bond as at Dec 31, 2019 –
Book value at Dec 31, 2018$567,872
Add: discount amortization$1,093
Book value at Dec 31, 2019 $568,965
Interest expense= $568,965 x 8% x 6/12 x 2/6 = $7,586
Hence, Total interest expense for 2019 = $15,137 + $22,706 + $7,586 = $45,429
Discount amortization, Dec 31, 2019 –
Interest payable, Dec 31, 2019 = $630,000 x 7% = $44,100
Less: interest expense $45,429
Total discount amortization = $1,329
Less: discount amortization, April 30, 2019$437
Less: Discount amortization, Oct 31, 2019$656
Discount amortization (Nov-Dec)= $1,329 - $437 - $656 = $236
Partial Balance Sheet at December 31, 2018
Liabilities
Bonds Payable (book value)
$567,872
April 30, 2019 Discount amortization
$$437
Oct 31, 2019 Discount amortization
$656
Dec 31, 2018 Discount amortization
$236
Balance at Dec 31, 2019
$569,201
Bonds payable = $569,201
Interest payable, Dec 31, 2019 = $630,000 x 7% = $44,100
1
Interest expense
$7,569
2
Bonds Payable
$567,872
Interest payable
$7,350
3
Interest expense
$45,429
4
Bonds Payable
$569,201
Interest payable
$44,100