Question

If a bond is issued at a discount, then the amortization of the discount will:

(A) Increase reported expense on the income statement.
(B) Decrease reported expense on the income statement.
(C) Have no effect on reported expense on the income statement.
(D) Be in violation of the Canada Business Corporations Act.

Answer 1

The amortization of a bond discount increases the reported expense on the income statement, reflecting the cost of borrowing over the life of the bond.

Step-by-step explanation:

If a bond is issued at a discount, the amortization of the discount will increase reported expense on the income statement. When a bond is sold at a discount, the selling price is less than the face value of the bond. Over the life of the bond, this discount is amortized, and the amortization amount is recorded as an interest expense. This means that each interest payment period, the interest expense recognized on the income statement is higher than the actual interest paid for that period since the amortization of the discount is added to the interest payment.