Adopting the effective-interest method means that the balance of the debenture liability represents:
A) the par value of the debenture.
B) the present value of the liability throughout the debenture term.
C) the adjustment to the debenture par value.
D) the borrowing cost.

Question

Quizplus · Accepted Answer

Adopting the effective-interest method requires calculating the present value of the liability throughout the debenture term, taking into account the borrowing cost. Therefore, the balance of the debenture liability will represent the present value of the liability rather than the par value of the debenture (option A), an adjustment to the debenture par value (option C), or simply the borrowing cost (option D).

Adopting the Effective-Interest Method Means That the Balance of the Debenture