If bonds are issued initially at a discount and the straight-line method of amortization is used for the discount, interest expense in the earlier years will be
A) Greater than if the compound interest method were used
B) The same as if the compound interest method were used
C) Less than if the compound interest method were used
D) Less than the amount of the interest payments

Question

Quizplus · Accepted Answer

The straight-line method of amortization spreads the discount on bonds evenly over the life of the bonds, resulting in a constant amount of interest expense each period. When bonds are issued at a discount, the actual interest expense includes both the payment to bondholders and the amortization of the discount. The straight-line method results in a lower amortization amount in the earlier years compared to the effective interest (or compound interest) method, which applies a constant interest rate to the carrying amount of the bond, leading to higher interest expense in the early years due to the increasing carrying amount. Therefore, interest expense in the earlier years is greater with the straight-line method than it would be with the compound interest method.

If Bonds Are Issued Initially at a Discount and the Straight-Line