Q21RQ - Horngren'S Financial And Managerial Accounting

Question

In regard to a bond discount or premium, what is the effective-interest amortization

method?

Step-by-Step Solution

Answer

Effective interest amotization is the method used amortize the bond by using the book value and actual interest rate.

Step 1: Definition of amortization

It is a process to reduce the cost of the purchased asset.

Step 2: Effective-interest amortization

This method calculates interest expense based on the current carrying amount of the bond and the market interest rate at issuance. It then amortizes the difference between the cash interest payment and calculated interest expense as a decrease in the discount or premium.