Review of bonds issued at a discount
Response to the following problem:
Read each statement below, indicate if it is true or false, and give a brief explanation of your answer.
1. When a bond is sold at a discount, the cash received is less than the present value of the future cash flows from the bond, based on the market rate of interest on the date of issue.
2. When a bond is issued at a discount, the semiannual cash interest payments are calculated using the market rate on the date of issue.
3. When a bond is issued at a discount, the semiannual amount of interest expense will be greater than the cash payment for interest.
4. When a bond is sold at a discount, the maturity value is less than the present value of the principal and interest payments, based on the market rate of interest on the date of issue.
5. The amortization of the discount on a bond payable results in additional interest expense recorded over the life of the bond.
6. When the year-end accrual of interest and amortization of discount is recorded, the carrying value of Bonds Payable on the balance sheet will increase.