When bonds are sold at a discount and the effective interest method is used, at each subsequent interest payment date, the cash paid is:
A) More than the effective interest.
B) Less than the effective interest.
C) Equal to the effective interest.
D) More than if the bonds had been sold at a premium.

Question

Quizplus · Accepted Answer

When bonds are sold at a discount, the effective interest method is used to allocate the total interest expense over the life of the bond. This means that the interest expense recognized each period will be more than the interest paid in cash. Therefore, the cash paid at each subsequent interest payment date will be less than the effective interest. If the bonds had been sold at a premium, the cash paid at each interest payment date would be more than if the bonds were sold at a discount.

When Bonds Are Sold at a Discount and the Effective