Under the effective-interest method of amortization, interest expense each period can be calculated by multiplying the:
A) face value of the bonds times the effective-interest rate for the appropriate time period.
B) carrying value of the bonds times the effective-interest rate for the appropriate time period.
C) face value of the bonds times the stated interest rate for the appropriate time period.
D) carrying value of the bonds times the stated interest rate for the appropriate time period.

Question

Quizplus · Accepted Answer

The effective-interest method of amortization uses the carrying value of the bonds to calculate the amount of interest expense each period. This is because the carrying value represents the actual cost of the bonds to the company, and it is this cost that is being spread out over the life of the bonds. The effective-interest rate takes into account factors such as the market interest rate and the company's creditworthiness, and it is used to calculate the amount of interest expense that will accurately reflect the cost of the bonds over time. Therefore, multiplying the carrying value of the bonds times the effective-interest rate for the appropriate time period will give the correct amount of interest expense for that period.

Under the Effective-Interest Method of Amortization, Interest Expense Each Period