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.

Question

Jaxon Harrison

Business

27 July, 00:15

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.

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Answers (1)

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Skyler Franklin · Answer 1

Answer: The following statements is true: The amount of unamortized discount decreases from its balance at issuance date to a zero balance at maturity.

Unamortized discount amount is decreased from balance at provision to a nil balance at due date. This is so, as it will be liquidated over entire bond's life and thus will reach $ 0 maturity.

Therefore, the correct option is (c).