Which of the Following Statements Correctly Describes the Accounting for Bonds

question 127

Multiple Choice

Which of the following statements correctly describes the accounting for bonds that were issued at a premium?

• A)The interest expense over the life of the bond is less than the total cash interest payments.
• B)The interest expense over the life of the bonds increases as the bonds mature when the effective interest method is used.
• C)The amortization of the premium on bonds payable account decreases as the bonds mature when the effective interest method is used.
• D)The book value of the bond liability increases when interest payments are made on the due dates when the effective interest method of amortization is useD.When bonds are issued at a premium, interest expense over the life of the bonds equals the total payments for interest minus the premium on bonds payable at the issue date.

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Definitions:

Quarterly Payment

Regular payments made every three months on a loan or investment.

Compounded Semi-annually

The process of adding interest to the principal sum of a loan or deposit, where the interest is added twice a year.

Perpetuity

A type of annuity that continues indefinitely, making regular payments for an infinite amount of time.

Compounded Monthly

The method of calculating interest where the earned interest is added to the principal each month, leading to interest on interest.