In 20x5,Horwitz Corporation issued ten-year,9 percent bonds when the market interest rate was 11 percent.Interest is payable annually.During 20x8,the market rate of interest for similar bonds was 12 percent.Using the effective interest method of amortization,what interest rate will be used to calculate interest expense for 20x8?

Question

Quizplus · Accepted Answer

Under the effective interest method of amortization, the interest expense is calculated by multiplying the carrying value of the bond at the beginning of the year with the effective interest rate. The effective interest rate is the market rate of interest at the time the bond was issued. Therefore, in 20x8, the interest rate used to calculate interest expense will still be 11 percent, which was the market rate of interest at the time the bond was issued. Hence, the correct choice is D, i.e., 11 percent.

In 20x5,Horwitz Corporation Issued Ten-Year,9 Percent Bonds When the Market