Which of the following statements regarding amortization is true?

Question

Quizplus · Accepted Answer

When a bond is issued at a premium, it means that the bond is sold for more than its face value. The premium on bonds payable is initially recorded as a credit balance in the premium on bonds payable account. Over the life of the bond, this premium is amortized, which means it is gradually reduced until it reaches zero at the bond's maturity.
The amortization of the premium has the effect of reducing the amount of interest expense recognized in the income statement. This is because the cash interest payments remain fixed based on the bond's stated interest rate and face value, but the effective interest rate (the market rate at the time of issuance) is lower due to the premium. As the premium is amortized, it decreases the interest expense recorded each period.
Therefore, statements a, b, and c are incorrect:
a. Amortization of the premium causes the premium on bonds payable account to increase. (Incorrect: Amortization decreases the premium over time.)
b. Amortization of the premium causes the amount of interest expense to increase. (Incorrect: Amortization decreases the interest expense over time.)
c. Cash interest payments on bonds equals interest expense on the income statement when there is amortization of bond premium. (Incorrect: Cash interest payments remain the same, but the interest expense reported on the income statement is reduced by the amount of premium amortized each period.)

Which of the Following Statements Regarding Amortization Is True