Eaton Company issued bonds when the stated rate of interest was 10% and the market rate was 10%. Which of the following statements is incorrect?
A) The bonds were issued at par.
B) Annual interest expense will equal the company's annual cash payments for interest.
C)The book value of the bonds will decrease as cash interest payments are made.
D)Annual interest expense is the same regardless of whether the effective-interest or straight-line method of amortization is useD.The cash payment of interest on the due date increases expenses and decreases assets. The payment does not affect the book value of the bond liability.

Question

Quizplus · Accepted Answer

The book value of the bonds will not decrease as cash interest payments are made because they were issued at par. The book value remains constant if bonds are issued at par and interest is paid.

Eaton Company Issued Bonds When the Stated Rate of Interest