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Indicate Whether Each of the Following Statements Regarding the Effective

Question 92

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Indicate whether each of the following statements regarding the effective interest method is true or false.

Premises:

Responses:

Interest expense is calculated by multiplying the beginning carrying value of the bond by the stated rate of interest.

False

Effective interest amortization can only be used on bonds that pay interest annually.

True

The carrying value of a bond issued at a premium will decrease by smaller and smaller amounts each year.

The effective interest method matches interest expense with the declining carrying value of the bond.

Interest expense on a bond issued at a discount will be lower in the bond's first year than if the company had used straight-line amortization.

Premises:

Interest expense is calculated by multiplying the beginning carrying value of the bond by the stated rate of interest.

Effective interest amortization can only be used on bonds that pay interest annually.

The carrying value of a bond issued at a premium will decrease by smaller and smaller amounts each year.

The effective interest method matches interest expense with the declining carrying value of the bond.

Interest expense on a bond issued at a discount will be lower in the bond's first year than if the company had used straight-line amortization.

Responses:

False

True

Correct Answer:

Premises:

Responses:

Interest expense is calculated by multiplying the beginning carrying value of the bond by the stated rate of interest.

Effective interest amortization can only be used on bonds that pay interest annually.

The carrying value of a bond issued at a premium will decrease by smaller and smaller amounts each year.

The effective interest method matches interest expense with the declining carrying value of the bond.

Interest expense on a bond issued at a discount will be lower in the bond's first year than if the company had used straight-line amortization.

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