On November 1, 2015, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bonds were dated November 1, 2015, and interest is payable each November 1 and May 1. Davis uses the straight-line method of amortization.
Which of the following is incorrect with regard to the Davis bonds when the straight-line method of amortization is utilized?

Question

Quizplus · Accepted Answer

When using the straight-line method of amortization, the interest expense is spread evenly over the life of the bonds. In this case, the bonds were issued at a discount ($29,100 instead of $30,000), which means that the market rate of interest exceeded the coupon rate of interest, and the semi-annual interest expense is less than the semi-annual cash interest payment. Therefore, choice D is incorrect. The semi-annual interest expense is $1,050 ($30,000 x 7% x 6/12 = $1,050), and the book value of the bonds increases $45 every six months ($900 of bond discount / 20 periods = $45 per period).

On November 1, 2015, Davis Company Issued $30,000, Ten-Year, 7