Share
Explore BrainMass

Bonds payable of Solomon Sales Co.

Bonds payable:

On January 1, 2005, Solomon Sales Co. issued zero coupon bonds with a face value of $6 million for cash. The bonds mature in 10 years and were issued at a price of $3,050,100.

a. Required: What is the annual effective interest rate in the market when the bonds were issued?

b. Required: What amount of interest expense on these bonds would Solomon Sales Co. report in its 2006 income statement?

c. Required: How much interest will Solomon Sales Co. pay on these bonds in 2007?

d. Required: What will Solomon Sales Co. report as the total carrying value of these bonds in its December 31, 2008, balance sheet?

e. Required: What total interest expense will Solomon Sales Co. report over the 10-year life of these bonds?

Solution Preview

Bonds payable:

On January 1, 2005, Solomon Sales Co. issued zero coupon bonds with a face value of $6
million for cash. The bonds mature in 10 years and were issued at a price of $3,050,100.

a. Required: What is the annual effective interest rate in the market when the bonds were
issued?

A zero-coupon bond is a bond that is bought at a deep discount from its face value. It pays zero annual interest during its life, but pays full face value on its maturity date.

In order to find the annual effective interest rate in the market, you need to find the use present value equation as follows: ...

Solution Summary

This solution is comprised of a detailed explanation and calculation to answer the request of the assignment of bonds payable of Solomon Sales Co.

$2.19