Which of the following statements about bond accounting under the effective interest method is correct?

Question

Quizplus · Accepted Answer

Under the effective interest method, the amount of interest expense recognized in the financial statements is determined by applying the bond's yield rate (also known as the market rate or effective interest rate at the time of issuance) to the bond's carrying value at the beginning of the period. The carrying value is the book value of the bond on the company's balance sheet, which is adjusted over time for amortization of any bond premium or discount.
Here's a breakdown of the statements provided:
a. The cash interest paid is calculated as the bond face value × the stated interest rate (coupon rate), not the yield rate. The yield rate is used to calculate interest expense, not the cash interest paid.
b. This is the correct statement. The interest expense under the effective interest method is indeed calculated as the carrying value of the bond at the beginning of the period multiplied by the yield rate.
c. The difference between the cash interest paid and the interest expense is not added to the carrying value of bonds sold at a premium. Instead, when a bond is sold at a premium, the premium is amortized over the life of the bond, which reduces the carrying value of the bond over time.
d. The difference between the interest expense and the cash interest paid is added to the carrying value of bonds sold at a discount, not deducted. When a bond is sold at a discount, the discount is amortized over the life of the bond, which increases the carrying value of the bond over time until it reaches the face value at maturity.
Therefore, the correct answer is b, which accurately describes the calculation of interest expense under the effective interest method.

Which of the Following Statements About Bond Accounting Under the Effective