On January 1,2011,Alpha Company issued $1,000,000 of 5%,20-year bonds to buy a new computerized accounting system.The market rate of interest was 6%.The bonds pay interest annually on December 31.Alpha uses the effective interest method of amortization.With each annual interest payment the unamortized ________ will grow ________.

Question

Quizplus · Accepted Answer

When using the effective interest method of amortization with bonds issued at a discount (as indicated by the market rate of interest being higher than the bond's coupon rate), the unamortized discount decreases over time because the interest expense recognized each period is higher than the cash paid for interest, reducing the discount.

On January 1,2011,Alpha Company Issued $1,000,000 of 5%,20-Year Bonds to Buy