1. If market interest rates are higher than the rate offered on the bonds being sold, they will be sold at:
A. a premium.
B. a discount.
C. face value.
D. a loss.
2. When bonds are issued at a premium, the bond premium:
A. reduces the amount of interest expense over the life of the bonds.
B. increases the amount of interest expense over the life of the bonds.
C. does not change the amount of interest expense over the life of the bonds.
D. is charged to interest expense when the bond is issued.
3. If bonds are issued for a price below their face value, the bond discount should be:
A. charged to expense on the date the bonds are issued.
B. amortized over the life of the bond issue.
C. shown as an addition to Bonds Payable in the Long-Term Liabilities section of the balance sheet.
D. shown as a current liability on the balance sheet.
I think number 2 is D. but if someone could please help thatd be great!
To determine the correct answer for question 2, let's understand the concept of bond premium. When a bond is issued at a premium, it means that the bond is being sold at a price higher than its face value.
The premium represents the difference between the selling price and the face value of the bond. This premium is not immediately charged to interest expense when the bond is issued. Instead, it is recorded on the balance sheet as a liability called "Premium on Bonds Payable."
Over the life of the bond, the premium is gradually amortized (reduced) to interest expense. This means that each period, a portion of the bond premium is being recognized as an expense and is deducted from interest expense on the income statement.
Now, let's revisit the options for question 2:
A. Reduces the amount of interest expense over the life of the bonds.
B. Increases the amount of interest expense over the life of the bonds.
C. Does not change the amount of interest expense over the life of the bonds.
D. Is charged to interest expense when the bond is issued.
Based on the explanation above, we can conclude that the correct answer for question 2 is B. Increases the amount of interest expense over the life of the bonds.