Question

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?
(For all requirements, do not round your intermediate calculations. Enter your answers in whole dollars.)

Answer 1

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