On November 1, 2013, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bonds were dated November 1, 2013, and interest is payable each November 1 and May 1. Which of the following is incorrect assuming the straight-line method of amortization is utilized?
A) The market rate of interest exceeded the stated rate of interest when the bonds were issued.
B) The semi-annual interest expense is $1,095.
C)The book value of the bonds increases $45 every six months.
D)The semi-annual interest expense is less than the semi-annual cash interest payment.

Question

Quizplus · Accepted Answer

Under the straight-line method of amortization, the bond discount of $900 ($30,000 - $29,100) would be amortized over the life of the bond, resulting in an annual amortization of $90 ($900 ÷ 10 years) and a semi-annual amortization of $45 ($90 ÷ 2). The annual interest expense would be $2,100 ($30,000 × 7%), resulting in a semi-annual interest expense of $1,050 ($2,100 ÷ 2). This is greater than the semi-annual cash interest payment of $1,000 ($30,000 × 7% × 6/12), so the incorrect statement is D.

On November 1, 2013, Davis Company Issued $30,000, Ten-Year, 7