The effective interest amortization method:
A) Allocates bond interest expense over the bond's life using a changing interest rate.
B) Allocates bond interest expense over the bond's life using a constant interest rate.
C) Allocates a decreasing amount of interest over the life of a discounted bond.
D) Allocates bond interest expense using the current market rate for each interest period.
E) Is not allowed by the IASB.

Question

Quizplus · Accepted Answer

The effective interest amortization method allocates bond interest expense over the bond's life using a constant interest rate. This rate is calculated as the market interest rate at the time of issuing the bond adjusted for any transaction costs or premiums/discounts. This method is in accordance with International Financial Reporting Standards (IFRS) and International Accounting Standards Board (IASB) requirements.

The Effective Interest Amortization Method