A corporation issues for cash $1,000,000 of 10%, 20-year bonds, interest payable annually, at a time when the market rate of interest is 12%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true?
A) The amount of annual interest expense is computed at 10% of the bond carrying amount at the beginning of the year.
B) The amount of annual interest expense gradually decreases over the life of the bonds.
C) The amount of unamortized discount decreases from its balance at issuance date to a zero balance at maturity.
D) The bonds will be issued at a premium.

Question

Quizplus · Accepted Answer

The amount of unamortized discount decreases from its balance at issuance date to a zero balance at maturity because the bonds are issued at a discount (market rate of interest is higher than the coupon rate), and the straight-line method amortizes this discount evenly over the life of the bond, reducing the discount to zero by maturity.

A Corporation Issues for Cash $1,000,000 of 10%, 20-Year Bonds