Question

Basil Corporation issues for cash $1,000,000 of 8%, 10-year bonds, interest payable annually, at a time when the market rate of interest is 7%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true?
The carrying amount decreases from its amount at issuance date to $1,000,000 at maturity.

Answer 1

Answer:

true

• The carrying amount decreases from its amount at issuance date to $1,000,000 at maturity.

Explanation:

Since the bond's coupon rate was higher than the market rate, the bond was sold at a premium or a higher price than face value. That means that the carrying of the bond will be larger than the face value of the bond. Since the straight line method is used to amortize the bond premium, the carrying value will decrease until it is equal to the face value at maturity date.