Question

Problem 14-8 (Static) Bonds; effective interest; partial period interest; financial statement effects [LO14-2] 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 $500,000 on November 1, 2021. The bonds sold for $442,215, 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

Answer 1

Lake Hamilton Development (LHD)

The amount of interest expense related to the bonds will LHD report in its income statement for the year ending December 31, 2021 is:

= $4,422.

Step-by-step explanation:

a) Data and Calculations:

November 1, 2021

Face value of bonds issued = $500,000

Bonds issue price = 442,215

Discounts on bonds = $57,785

Maturity period = 20 years on October 31, 2041

Interest rate on the bonds = 5% paid semiannually

Interest payment dates = April 30 and October 31

Effective interest rate = 6%

For the two months of 2021:

Interest Payable = $4,167 ($500,000 * 5% * 2/12)

Discount amortization $255 ($4,422 - $4,167)

Interest Expense = $4,422 ($442,215 * 6% * 2/12)