The theoretical justification in support of the effective interest method of amortizing a discount is that it represents
A)a stable interest expense
B)a stable interest rate
C)an increasing balance in the discount account
D)an increasing balance in the book value account

Question

Quizplus · Accepted Answer

The effective interest method of amortizing a discount results in a stable interest rate, which is why it is used in financial reporting. This method reflects the time value of money principle, which allows for the interest expense and discount to be systematically allocated over the term of the debt. The balance in the discount account will decrease over time, while the book value account will increase until it matches the face value of the bond at maturity. However, the primary justification for using the effective interest method is to ensure that interest expense is recognized at a constant rate over the term of the debt. Therefore, option B is the best choice.

The Theoretical Justification in Support of the Effective Interest Method