If a company uses the effective interest method of amortizing a bond discount, the interest expense that is recognized each year will:
A) be greater than the interest payment.
B) increase from year to year.
C) remain the same from year to year.
D) be greater than the interest payment and also will increase from year to year.

Question

Quizplus · Accepted Answer

Under the effective interest method, the interest expense is calculated based on the carrying amount of the bond at the beginning of the period and the market rate at issuance. Since the carrying amount increases as the discount is amortized, the interest expense will be greater than the interest payment and will increase each year.

If a Company Uses the Effective Interest Method of Amortizing