Deany Company issued $100,000 bonds.The stated rate of interest was 8% and the market rate 9%.Which of the following statements is true?

Question

Quizplus · Accepted Answer

Since the market rate is higher than the stated rate, it means the bonds were issued at a discount. As such, the annual interest expense will exceed the company's actual cash payments for interest. The exact amount will need to be calculated using the effective interest method. Option A is incorrect as the bonds were issued at a discount, not a premium. Option C is incorrect as the annual interest expense will be higher than $8,000 due to the discount. Option D is incorrect as the company can still issue bonds even if the market rate is higher than the stated rate, it just means the bonds will be issued at a discount.

Deany Company Issued $100,000 Bonds