There are two methods for amortizing premiums and discounts on the sale of bonds.The differences between the two methods are:
A)There are no differences between the two methods.
B)Both methods charge a constant amount of interest to the financial statements each year; however, the effective interest method charges a larger total amount of interest expense over the life of the bond.
C)The effective interest method charges a different interest expense each year while the straight-line method results in a constant amount of expense each year.
D)None of these answers are correct.

Question

Quizplus · Accepted Answer

The effective interest method results in a varying amount of interest expense each year because it applies the interest rate to the carrying amount of the bond at the beginning of each period, which changes as the bond's book value is adjusted for amortization. The straight-line method, on the other hand, divides the total amount of the premium or discount by the number of periods over the bond's life, resulting in the same amount of expense each year.

There Are Two Methods for Amortizing Premiums and Discounts on the Sale