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. Gammel Company uses the straight-line method of amortization. Which of the following statements is incorrect?
A) The market rate of interest exceeded the stated 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 is amortized over 10 years, resulting in $200 per year. 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