Which of the following statements correctly describes the accounting for bonds that were issued at a discount?
A)The market rate of interest is less than the coupon interest rate.
B)The interest expense over the life of the bonds will be less than the total cash interest payments.
C)The present value of the bonds' future cash flows is greater than the bonds' maturity value.
D)The book value of the bond liability increases when interest payments are made on the due dates.

Question

Quizplus · Accepted Answer

When bonds are issued at a discount, it means they are sold for less than their face value. The discount on the bond is amortized over the life of the bond, which increases the book value of the bond liability with each interest payment. This is because the interest expense recognized in the financial statements includes both the cash payment and the amortization of the discount, which together are higher than the bond's coupon rate. This process gradually increases the book value of the bond to its face value by the maturity date.

Which of the Following Statements Correctly Describes the Accounting for Bonds