The accounting profession requires that significant amounts of bond discount or premium be amortized by using the effective interest rate. Under this method, the effective interest rate (at the time the bonds were issued) is multiplied times the bond's carrying value. The result is the amount of interest expense for each reporting period. The difference between this expense and the actual interest paid will be the amount of discount or premium that is being amortized during the reporting period. The effective interest rate method ensures that the interest expense on the income statement will be directly related to the bond amounts on the balance sheet.
Studies show that exam questions are a great way to learn and retain important information. Gain access to our 1,700 accounting exam questions (and answers) when you upgrade to PRO.