When using the effective-interest method of amortizing a discount or premium,interest expense is calculated by multiplying the:
A) contract interest rate by the face value of the bonds
B) effective-interest rate by the face value of the bonds
C) contract interest rate by the carrying value of the bonds
D) effective-interest rate by the carrying value of the bonds

Question

Quizplus · Accepted Answer

The effective-interest method of amortizing a discount or premium takes into account the changing carrying value of the bonds over time, so interest expense is calculated by multiplying the effective-interest rate by the carrying value of the bonds. This ensures that interest expense accurately reflects the cost of borrowing and the actual interest rate incurred by the issuer. Choices A and C do not reflect the changing value of the bond over time and only use the face value of the bond, which is not an accurate representation of the cost of borrowing. Choice B is also incorrect because it only multiplies the effective-interest rate by the face value of the bond, which does not reflect the changing carrying value over time.

When Using the Effective-Interest Method of Amortizing a Discount or Premium,interest