A corporation issues for cash $2,000,000 of 8%, 15-year bonds, interest payable annually, at a time when the market rate of interest is 7%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true?

Question

Quizplus · Accepted Answer

Since the market rate of interest is lower than the bond's stated rate of interest, the bonds are issued at a premium. As the straight-line method is adopted, the bond discount or premium amortization is allocated evenly over the life of the bonds. Therefore, the carrying amount decreases from its amount at issuance date to $2,000,000 at maturity. The amount of annual interest paid to bondholders remains the same as it is based on the stated rate of interest. The amount of annual interest expense also remains the same as it is based on the carrying amount, which is decreasing by the same amount as the bond premium is being amortized.

A Corporation Issues for Cash $2,000,000 of 8%, 15-Year Bonds