With the effective interest method of amortization, the amortization of a bond discount results in a(n)

Question

Quizplus · Accepted Answer

When a bond is issued at a discount, it means the bond is sold for less than its face value. Over the life of the bond, this discount must be amortized, which means it is gradually expensed out to interest expense over the term of the bond. The effective interest method of amortization uses a constant interest rate to apply to the carrying amount of the bond at the beginning of each period, resulting in a varying interest expense and amortization amount each period.
As the bond discount is amortized, the carrying value of the bond (the book value) increases until it reaches the face value of the bond at maturity. This process does not affect stockholders' equity directly, nor does it decrease liabilities since the face value of the bond does not change. Instead, it increases the interest expense reported on the income statement because the company is recognizing the additional cost of borrowing over the life of the bond.
Therefore, the correct answer is:
c. increase in interest expense.

With the Effective Interest Method of Amortization, the Amortization of a Bond