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

The effective interest method of bond accounting calculates interest expense as the carrying value of the bonds multiplied by the yield rate. This ensures that interest expense is recognized over the life of the bond in a way that reflects the effective interest rate that investors are receiving. The cash interest paid will be based on the bond's nominal (or face) rate and face value, and will not necessarily be the same as the interest expense. The difference between the interest expense and the interest paid will be added to or deducted from the carrying value of the bond, depending on whether the bond was issued at a premium or discount.

Which of the Following Statements About Bond Accounting Under the Effective