You are the new controller for Moonlight Bay Resorts. The company CFO has asked

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, 2018. Your accounting group provided you the following information on the company's debt (FV?f $1. PV of $1. FVA of $1. PVA of $1. FVAD of $1 and PVAD of $) (Use appropriate factor(s) from the tables provided.) I. On July 1, 2018, Moonlight Bay issued bonds with a face amount of $2,000,000. The bonds mature in 20 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 annual payment is $75,000, payable each June 30. beginning January 1, 2018, Moonlight Bay's incremental borrowing rate on the date of the lease was 11% and the lessor's implicit 2 At December 31, 2017, Moonlight Bay had a 10% installment note payable to Third Mercantile Bank with a balance of $530,000. The 3. On January 1, 2018, Moonlight Bay leased a building under a finance lease calling for four annual lease payments of $40,000 rate, which was known by Moonlight Bay, was 10%. Required Calculate interest expense for the year ended December 31, 2018. (Round your answer to nearest whole dollar.) nterest expense

Explanation / Answer

1. The Value of the Bond is is the present value of the coupon payments:

for a 20 year bond, the present value is 2,000,000 X 11% X (1- (1/(1+6%)2X20)/6%) + 2,000,000/(1+12%)20= 1,862,426.19

The interest to be recognized for 6 months is 6% X 1,862,426.19 = $111,745.57

2. 2 Installments are payable on the note payable in 2018:

The first installment of 75,000 includes an interest component of $530,000 X 10%/2 = 26,500

The principal repayment is 75,000 - 26,500 = 48,500

The second install ment includes an interest component of (530,000 - 48,500) X 10%/2 = 24,075

The total interest on notes payable = 26,500 + 24,075 = $50,575

3. The present value of the lease is 40,000 + 40,000/(1+11%) + 40,000/(1+11%)2 + 40,000/(1+11%)3

= $137,749

The interest for 2018 is 137,749 X 11% = $15,152.34

Answer

The total interest for the year ended December 31, 2018 is $111,745.57 + $50,575+ $15,152.34 = $177,472.9

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