Question

Q1) Consider the following statements:

Statement 1. When amortizing a bond discount, the bond’s amortized cost decreases each period as the interest expense increases.

Statement 2. When amortizing a bond premium, the bond’s amortized cost increases each period as the interest expense increases.

Select one:

a. Neither of the statements is correct

b. Only statement 1 is correct

c. Only statement 2 is correct

d. Both statements are correct

Q2) A type of amortization method used to amortize bond discount/premium that records interest expense based on the amortized cost of the bond—that is, on the bond’s book value at the end of the previous period is called:

Select one:

a. Effective-interest amortization method

b. Units of production method

c. Straight-line amortization method

d. None of the available choices

Q3) Effective interest amortization method uses which of the following rates to determine interest expense?

Select one:

a. Bond rate

b. Effective amortization rate

c. Market rate

d. Coupon rate

Q4) On July 31, 2018, Hummbug Corporation issued $100,000, 5%, 20-year bonds for $113,678 when the market interest rate was 4%. The bonds pay semi-annual interest on July 31 and January 31. Hummbug uses the effective interest method to amortize its bond discount or premium, and it has a January 31 year-end. How much would interest expense from these bonds be recorded in Hummbug’s financial statements for the year ended January 31, 2019?

Select one:

a. $226

b. $2,274

c. $4,774

d. $2,500

Answer 1

1	a. Neither of the statement is correct
	Correct statements are:
	1	When amortizing a bond discount, the bond’s amortized cost increases each period as the interest expense increases
	2	when amortizing a bond premium, the bond’s amortized cost increases each period as the interest expense decreases
2	a. Effective-interest amortization method
3	c. Market rate
4	Interest expense=Carrying value of the bond*Market interest rate*(6/12)=113678*4%*(6/12)=113678*2%=2273.56=$ 2274
	Answer is
	b. $2274