When bonds are sold at a discount, if the annual straight-line amortization amount is compared to the annual effective interest amortization amount over the life of the bond issue, the annual amount of the straight-line amortization of discount is:
A) Higher than the effective interest amount every year.
B) Higher than the effective interest amount in the early years and less than the effective interest amount in the later years.
C) Less than the effective interest amount in the early years and more than the effective interest amount in the later years.
D) Less than the effective interest amount every year.

Question

Quizplus · Accepted Answer

When bonds are sold at a discount, the effective interest method allocates a higher amortization amount to interest expense in the early years and a lower amount in the later years because the carrying value of the bond is declining. On the other hand, the straight-line method allocates the same amount of amortization to each year. Therefore, the annual amount of straight-line amortization will be higher than the effective interest amount in the early years and less than the effective interest amount in the later years.

When Bonds Are Sold at a Discount, If the Annual