Gammell Company issued $50,000 of 9% bonds with annual interest payments.The bonds mature in ten years.The bonds were issued at $48,000.Gammell Company uses the straight-line method of amortization.
- Which of the following statements is incorrect?
A)The market rate of interest exceeded the coupon rate of interest when the bonds were issued.
B)The annual interest expense exceeds the annual cash interest payment by $200.
C)The annual increase in the bond book value is $200.
D)The annual interest expense is $4,300.

Question

Quizplus · Accepted Answer

The annual interest expense is calculated by adding the annual amortization of the discount to the annual cash interest payment. The discount is $2,000 ($50,000 - $48,000), and the annual amortization is $200 ($2,000 / 10 years). The annual cash interest payment is $4,500 ($50,000 * 9%). Therefore, the annual interest expense is $4,700 ($4,500 + $200), not $4,300.

Gammell Company Issued $50,000 of 9% Bonds with Annual Interest