When the effective-interest method is used to amortize bond premium or discount, the periodic amortization will
A) increase if the bonds were issued at a discount.
B) decrease if the bonds were issued at a premium.
C) increase if the bonds were issued at a premium.
D) increase if the bonds were issued at either a discount or a premium.

Question

Quizplus · Accepted Answer

The effective-interest method of amortization involves applying a constant interest rate to the carrying amount of the bond for each period. As the carrying amount of the bond increases (for a discount) or decreases (for a premium) over time, the amount of interest expense recognized also changes, leading to a change in the periodic amortization amount. This means that whether the bonds were issued at a discount or a premium, the periodic amortization amount will indeed increase over time as the carrying amount of the bond approaches its face value.

When the Effective-Interest Method Is Used to Amortize Bond Premium