Which of the following statements about bond accounting under the effective interest method is correct?
A)The cash interest paid is calculated as the bond face value * the yield rate.
B)The interest expense is calculated as the carrying value * the yield rate.
C)The difference between the cash interest paid and the interest expense is added to the carrying value of bonds sold at a premium.
D)The difference between the interest expense and the interest paid is deducted from the carrying value of bonds sold at a discount.

Question

Quizplus · Accepted Answer

Under the effective interest method, the interest expense is calculated as the carrying value of the bond multiplied by the yield rate. The cash interest paid is the actual interest payment made by the company to the bondholders. The difference between the cash interest paid and the interest expense is not added to the carrying value of bonds sold at a premium but is instead used to adjust the amortization of the premium. Similarly, the difference between the interest expense and the interest paid is not deducted from the carrying value of bonds sold at a discount but is instead used to adjust the amortization of the discount. Therefore, option B is the correct statement.

Which of the Following Statements About Bond Accounting Under the Effective