Question

# The fiscal year ends December 31 for Lake Hamilton Development. To provide funding for its Moonlight...

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 \$560,000 on November 1, 2021. The bonds sold for \$495,280, a price to yield the market rate of 6%. 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?

 1 Bond issued on Nov 1 Interest expense for the 6 months=Carrying value as on Nov 1*Market rate*(6/12)=495280*6%*6/12=\$ 14858.4 Interest expense related to the bonds will LHD report in its income statement for the year ending December 31, 2021 (for 2 months)=14858*(2/6)=\$ 4953 2 Balance sheet \$ \$ Current liabilities: Interest payable (Note:2) 4667 Long-term liabilities: Bonds payable 560000 Less:Discount on issue of bonds (Note:1) 63984 496016
 Note:1 Discount on issue as on Nov 1=Face value-Issue price=560000-495280=\$ 64720 Discount to be amortized Apr 30=Interest expense-Interest paid Interest paid=Face value*Stated rate*(6/12)=560000*5%*(6/12)=\$ 14000 Interest expense=\$ 14858.4 Discount to be amortized Apr 30=14858.4-14000=\$ 858.40 Discount to be amortized on Dec 31-For 2 months=858.40*(2/6)=\$ 286.1333 Balance in discount on issue of bonds on Dec 31=64270-286.1333=\$ 63984 Note:2 Interest to be paid on Apr 30,2022=\$ 14000 Interest payable from Nov 1 to Dec 31=14000*(2/6)=\$ 4667 3 For Jan 1 to Apr 30. Interest expense for 4 months=14858.4*(4/6)=\$ 9905.6 For May 1 to Oct 31. Interest expense for the 6 months=Carrying value as on Apr 30*Market rate*(6/12) Carrying value as on Apr 30=Carrying value as on Nov 1+Discount amortized=495280+858.40=\$ 496138.40 Interest expense for the 6 months=496138.40*6%*(6/12)=\$ 14884.15 For Nov 1 to Dec 31. Interest expense for the 6 months=Carrying value as on Oct 31*Market rate*(6/12) Carrying value as on Oct 31=Carrying value as on Apr 30+Discount amortized from May 1 to Oct 31 Discount amortized from May 1 30 to Oct 31=Interest expense-Interest paid=14884.15-14000=\$ 884.15 Carrying value as on Oct 31=496138.40+884.15=\$ 497022.6 Interest expense for the 6 months=497022.6*6%*(6/12)=\$ 14910.68 Interest expense for Oct 31 to Dec 31-2 months=14910.68*(2/6)=\$ 4970.227
 Interest expense related to the bonds will LHD report in its income statement for the year ending December 31, 2022: \$ For Jan 1 to Apr 30. 9905.6 For May 1 to Oct 31. 14884.15 For Nov 1 to Dec 31. 4970.227 Total 29760 4 Balance sheet \$ \$ Current liabilities: Interest payable (Note:2) 4667 Long-term liabilities: Bonds payable 560000 Less:Discount on issue of bonds (Note:3) 62224 497776
 Note:3 For Jan 1 to Apr 30. Discount to be amortized-For 4 months=858.40*(4/6)=\$ 572.2667 For May 1 to Oct 31. Discount amortized from May 1 to Oct 31=\$ 884.15 For Nov 1 to Dec 31. Discount to be amortized Apr 30=Interest expense-Interest paid Interest paid=\$ 14000 Interest expense=\$ 14910.68 Discount to be amortized Apr 30=14910.68-14000=\$ 910.68 Discount to be amortized on Dec 31-For 2 months=910.68*(2/6)=\$ 303.56 Total discount amortized in 2022=572.2667+884.15+303.56=\$ 1759.977 Balance in discount on issue of bonds on Dec 31=Balance in discount on issue of bonds on Dec 31-Total discount amortized Balance in discount on issue of bonds on Dec 31=63984-1759.977=\$ 62224

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