Under the effective-interest method, if bonds are issued at a discount the amount of interest expense:
A) increases each period as the bonds move towards maturity.
B) decreases each period as the bonds move towards maturity.
C) remains the same for each interest period.
D) equals the amount of cash paid for each interest period.

Question

Quizplus · Accepted Answer

Under the effective-interest method, the amount of interest expense increases each period as the bonds move towards maturity because the discount on the bond is gradually amortized over the life of the bond. This means that a portion of the discount is added to the interest expense each period to reflect the effective interest rate of the bond. Therefore, choice A is the correct answer.

Under the Effective-Interest Method, If Bonds Are Issued at a Discount