Trent Corp.purchased $1,000,000 of bonds at 96 when the market yield was 8%.The bonds pay interest at the rate of 6%.Trent intends to hold these bonds to maturity and will not need to sell the bonds before that date. Which of the following statements is not correct?
A)Since the bonds were purchased at a discount,the cash interest will be less than interest revenue.
B)Since the bonds were purchased at a discount,the book value of the bond investment will increase toward its maturity value.
C)Since the bonds were purchased at a discount,the bond investment will be classified and accounted for as a trading security.
D)The company would recognize a gain or loss on the bonds if they are sold prior to their maturity date.

Question

Quizplus · Accepted Answer

Since Trent Corp. intends to hold the bonds to maturity and will not need to sell them before that date, the bond investment would be classified and accounted for as held-to-maturity security, not a trading security. The other options are correct - cash interest will be less than interest revenue due to the purchase at a discount, the book value will increase towards maturity value, and a gain or loss will be recognized if the bonds are sold before maturity.