Under the effective-interest method of amortization, the amount of discount amortized each interest period is equal to the:
A) amount of interest expense less the cash paid.
B) amount of interest expense plus the cash paid.
C) face value of the bond times the stated interest rate.
D) face value of the bond times the market interest rate at the date of issue.

Question

Quizplus · Accepted Answer

The effective-interest method of amortization requires the discount to be amortized over the life of the bond, which means that the amount of discount amortized each interest period is calculated based on the interest expense and the cash paid. Specifically, it is equal to the interest expense for the period minus the cash paid during the period. This results in a reducing balance of the discount over the life of the bond. Choice B is incorrect because adding the cash paid to the interest expense would result in an overstatement of the discount amortization. Choices C and D are incorrect because they do not take into account the effective interest rate, which is the rate that equates the present value of the bond's cash flows to its initial carrying amount.

Under the Effective-Interest Method of Amortization, the Amount of Discount