Under the effective-interest method, if bonds are issued at a premium:
A)the amount of interest expense decreases each interest period as the bonds move towards maturity value.
B)the amount of interest expense remains the same for each interest period as the bonds move towards maturity value.
C)the amount of interest expense increases each period as the bonds move towards maturity value.
D)none of the above occur.

Question

Quizplus · Accepted Answer

Under the effective-interest method of bond accounting, interest expense is calculated as a percentage of the carrying value (not the face value) of the bonds. When bonds are issued at a premium, it means that the market interest rate is less than the stated interest rate of the bonds. As a result, the effective interest rate is less than the stated interest rate.

Because interest expense is calculated using the effective interest rate, it decreases each period as the carrying value of the bonds decreases towards their maturity value. Hence, choice A is correct.

Under the Effective-Interest Method, If Bonds Are Issued at a Premium