When interest expense is calculated using the effective-interest amortization method,interest expense on a bond that pays interest annually is equal to:
A)the actual amount of interest paid.
B)the carrying value of the bonds payable multiplied by the effective interest rate.
C)the maturity value of the bonds payable multiplied by the effective interest rate.
D)the carrying value of the bonds payable multiplied by the stated interest rate.

Question

Quizplus · Accepted Answer

When using the effective-interest amortization method, the interest expense is calculated based on the carrying value of the bonds payable multiplied by the effective interest rate. This method takes into account the time value of money and the fact that the carrying value of the bonds changes over time as a result of different factors such as discount or premium on issuance, amortization of bond discount or premium, and accrued interest. Therefore, the actual amount of interest paid (choice A), the maturity value of the bonds payable multiplied by the effective interest rate (choice C), and the carrying value of the bonds payable multiplied by the stated interest rate (choice D) are not accurate representations of the interest expense on a bond that pays interest annually.

When Interest Expense Is Calculated Using the Effective-Interest Amortization Method,interest