Chang Corp. purchased $1,000,000 of bonds at par value on April 1, 2016. The bonds pay interest at the rate of 10%. Chang intends to hold these bonds to maturity. Which of the following statements is false?
A)Since the bonds were issued at par value, the cash interest will be the same as interest revenue.
B)The bonds will earn $75,000 of interest by December 31, 2016.
C)The bond investment must be accounted for using the fair value method.
D)Since the bonds were classified as held-to-maturity, the company would not recognize unrealized gains or losses on the bonds during the period held by Chang.

Question

Quizplus · Accepted Answer

The statement that the bond investment must be accounted for using the fair value method is false. As the company intends to hold the bonds until maturity and has the ability to do so, it can classify the investment as held-to-maturity and account for it at amortized cost. This means that the company will not record changes in the fair value of the bonds in its income statement but will adjust the carrying value of the investment in its balance sheet over time to reflect the interest received and the amortization of any premium or discount. Choices A, B, and D are true statements.