Asked by Janninah Miller on Jul 01, 2024
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 bonds will be issued at a premium.
Straight-Line Method
An approach to depreciation that divides the cost of an asset evenly over its expected lifespan, resulting in the same depreciation expense annually.
Annual Interest Expense
The total cost incurred by a borrower in a year for all debts, represented as the interest payments made on any borrowed funds.
Bond Discount
The difference between the face value of a bond and its selling price when the bond is sold for less than its face value.
- Unveil the accounting entries related to the process of issuing bonds, interest remittance, bond discount/premium amortization, and the redemption of bonds.
- Absorb the methods for the amortization of bond discount and premium and their effect on financial charges.
- Work out the cash earnings from bond sales and the persistent value of the bond across its life cycle.
Learning Objectives
- Unveil the accounting entries related to the process of issuing bonds, interest remittance, bond discount/premium amortization, and the redemption of bonds.
- Absorb the methods for the amortization of bond discount and premium and their effect on financial charges.
- Work out the cash earnings from bond sales and the persistent value of the bond across its life cycle.