Discount-Mart issues $10 million in bonds on January 1, 2021. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds:
Date Cash Paid Interest Expense Increase in Carrying Value Carrying Value
01/01/2021 $ 8,640,967
06/30/2021 $ 300,000 $ 345,639 $ 45,639 8,686,606
12/31/2021 300,000 347,464 47,464 8,734,070
06/30/2022 300,000 349,363 49,363 8,783,433
12/31/2022 300,000 351,337 51,337 8,834,770
What is the stated annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six-month rate.)
A) 3%.
B) 4%.
C) 6%.
D) 8%.
Answer: C
When bonds are retired before their maturity date:
A) GAAP has been violated.
B) The issuing company will always report a non-operating gain.
C) The issuing company will always report a non-operating loss.
D) The issuing company may report a non-operating gain or loss.
Answer: D
An amortization schedule for a bond issued at a premium:
A) Has a carrying value that increases over time.
B) Is contained in the balance sheet.
C) Is a schedule that reflects the changes in the carrying value of the bond over its term to maturity.
D) All of the other answer choices are correct.
Answer: C
