A corporation issues $500,000, 11%, 15-year bonds, interest payable annually, at a time when the market...
A corporation issues $500,000, 11%, 15-year bonds, interest payable annually, at a time when the market rate of interest is 10%. The straight line method is adopted for the amortization of a 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 increases over the life of the bond.
C. The amount of unamoritized premium decreases from its balance at issuance date to a zero balance at maturity.
D. The bonds will be paid off early.
Homework Answers
Correct answer----The amount of unamoritized premium decreases from its balance at issuance date to a zero balance at maturity.
.
When Straight line method is used interest expense remains same and do not increase or decrease.
The bond will be paid at the maturity not early.
Interest expense will be calculated at 10% only when effective interest method is used for amortization of premium.
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