The effective interest method allocates bond interest expense over the life of the bonds in a way that yields a constant rate of interest.

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The effective interest method is a method of allocating bond interest expense over the life of the bonds in a way that yields a constant rate of interest. This is achieved by adjusting the carrying value of the bonds each period for the amortization of any premium or discount, and then applying the effective interest rate to calculate the interest expense for the period. This results in a constant rate of interest being applied to the carrying value of the bonds each period, and ensures that the total interest expense over the life of the bonds is equal to the total interest payments made to bondholders.

The Effective Interest Method Allocates Bond Interest Expense Over the Life