Question

On January 1, 2018, Morton Sales Co. issued zero-coupon bonds with a face value of $6.5 million for cash. The bonds mature in 12 years and were issued at a price of $2,886,065. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required: What will Morton Sales Co. report on these bonds in its December 31, 2018, balance sheet? (Enter your answer rounded to the nearest whole dollar. Round your intermediate calculations to the nearest whole dollar.)

Answer 1

Solution :

Present value of face amount = $2,886,065

Face value of zero coupon bond = $6,500,000

Let implicit interest rate = i

Present value factor at i for 12th period = $2,886,065 / $6,500,000 = 0.44401

Refer PV Factor table, this factor falls at interest rate = 7%

Hence implicit rate of interest in zero coupon bond = 7%

Amount at which Morton Sales Co. report on these bonds in its December 31, 2018, balance sheet = Issue value + Interest or 2018

= $2,886,065 + $2,886,065*7% = $3,088,090