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 the annual interest expense is computed at 10% of the bond carrying amount at the beginning of the year.
B) The amount of the 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 amount of unamortized premium decreases from its balance at issuance date to a zero balance at maturity.

Question

Quizplus · Accepted Answer

The unamortized discount decreases over time as it is amortized to interest expense, reaching zero at maturity.

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