Question

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, 2021. The bonds sold for $567,653, a price to yield the market rate of 8%. 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

Answer 1

Answer:

$7,568.67

Explanation:

The computation of interest expenses is shown below:-

Date                Cash payment   Effective      Increase         Balance

                                                   interest       in balance

11/1/2021                                                                                $567,653

30/4/2022         $22,050      $22,706            $656           $568,309

                                                                                        ($656 + $567,653)

30/10/2022        $22,050      $22,732             $682         $568,991

30/4/2023          $22,050      $22,760             $710          $569,701

Interest expenses related to the bonds = $22,706 × 2 ÷ 6

= $7,568.67

Working Note :-

Cash Payment = Face amount × Issued bonds percentage × 6 months ÷ 12 months

= $630,000 × 7% × 6 ÷ 12

= $22,050

Effective interest for 30/4/2022 = Sold bonds × Market rate × 6 months ÷ 12 months

= $567,653 × 8% × 6 ÷ 12

= $22,706

Effective interest for 30/10/2022

= $568,309 × 8% × 6 ÷ 12

= $22,732

Effective interest for 30/4/2023

= $568,991 × 8% × 6 ÷ 12

= $22,760