Gammell Company issued $50,000 of 9% bonds with annual interest payments. The bo
ID: 2454805 • Letter: G
Question
Gammell Company issued $50,000 of 9% bonds with annual interest payments. The bonds mature in ten years. The bonds were issued at $48,000. Gammel Company uses the straight-line method of amortization. Which of the following statements is incorrect? The annual increase in the bond book value is $200. The annual interest expense exceeds the annual cash interest payment by $200. The market rate of interest exceeded the stated rate of interest when the bonds were issued. The annual interest expense is $4,300.
Explanation / Answer
Answer: The annual interest expense is $4,300.
Because
The straight-line discount amortization ($200) = Discount on bonds payable ($50,000 - $48,000) ÷ 10 annual interest payments.
Annual interest expense ($4,700) = Annual cash payment ($50,000 × .09) + Discount on bonds payable amortization ($200).
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