At december 31, 2017, moonlight bay had a 10% installment note payable to third mercantile bank with a balance of $610,000. the annual payment is $115,000, payable each june 30. on january 1, 2018, moonlight bay leased a building under a finance lease calling for four annual lease payments of $40,000 beginning january 1, 2018. moonlight bay’s incremental borrowing rate on the date of the lease was 9% and the lessor’s implicit rate, which was known by moonlight bay, was 8%.calculate interest expense for the year ended december 31, 2018.

Total Interest expense accrued for December 31th 2018: 39.612,66‬

Explanation:

Interest expense for Year ended December 31th, 2018

accrued Third Mercantile Bank note payable:

principal x rate x time

610,000 x 10% x 6/12 = 30,500 interest expense

Lease interest expenses:

We must determinate the value of the lease and then the interest accrued for the year:

Present value of the lease:

C40,000.00

time4

rate0.09

PV$141,251.7866

carrying value after first payment:

141,251.79 - 40,000 = 101,251.79

interest expense accrued from Jan 1st to December 31th

101,251.79 x 9% = 9,112.66

Total interest expense: 30,500 + 9,112.66 = 39.612,66‬

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