If a company uses the effective interest method of amortizing a bond premium, the carrying value of the bond will:
A) decrease by equal amounts each year.
B) decrease by smaller amounts each year.
C) decrease by larger amounts each year.
D) be lower than the face value of the bond until maturity.

Question

Quizplus · Accepted Answer

When the effective interest method is used to amortize a bond premium, the amount of interest expense recognized decreases each year as the carrying value of the bond liability decreases. Because interest expense is smaller each year, the amortization of the bond premium increases each year, so the carrying value of the bond decreases by larger and larger amounts each year.

If a Company Uses the Effective Interest Method of Amortizing