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.

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).