Interest expense is computed annually when a bond is issued for other than its face value.For a bond issued at a premium,how will this component change under the effective interest method as the bond approaches maturity?
A)Decrease
B)Increase
C)Remain constant
D)Not enough information given to decide

Question

Quizplus · Accepted Answer

When a bond is issued at a premium, the effective interest method will result in a decrease in the interest expense as the bond approaches maturity. This is because the effective interest rate will decrease over time, as the difference between the bond's face value and its carrying value (which declines toward face value as the bond nears maturity) becomes smaller. Thus, the amount of interest expense recognized each period will gradually decrease as the bond approaches its maturity date.

Interest Expense Is Computed Annually When a Bond Is Issued