A corporation issues for cash $1,000,000 of 10%, 20-year bonds, interest payable

Question

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 bonds will be issued at a premium.

b. The amount of the annual interest expense is computed at 10% of the bond carrying amount at the beginning of the year.

c. The amount of unamortized discount decreases from its balance at issuance date to a zero balance at maturity.

d. The amount of the annual interest expense gradually decreases over the life of the bonds.

Explanation / Answer

Answer:

b. The amount of the annual interest expense is computed at 10% of the bond carrying amount at the beginning of the year.

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