Gibson Corporation amortizes its bonds using the effective interest method. Which statement is correct?
A)[Interest expense] = [Stated rate] X [Carrying value of the bonds]
B)[Interest expense] - [Cash interest paid] = [Increase in carrying value if sold at a discount]
C)[Cash interest payment] = [Bond face amount] X [Market interest rate]
D)[Interest expense] - [Cash interest paid] = [Increase in carrying value if sold at a premium]

Question

Quizplus · Accepted Answer

The effective interest method requires the calculation of interest expense based on the carrying value of the bond, which changes over time due to the accretion or amortization of any discount or premium on the bond. This means that the interest expense incurred each period will not necessarily equal the cash interest paid. The difference between the two represents the increase or decrease in the carrying value of the bond. Therefore, statement B is correct.

Gibson Corporation Amortizes Its Bonds Using the Effective Interest Method