Indicate whether each of the following statements regarding the effective interest method is true or false.________ a) The effective interest method matches interest expense with the declining carrying value of the bond.________ b) Interest expense on a bond issued at a discount will be lower in the bond's first year than if the company had used straight-line amortization.________ c) The carrying value of a bond issued at a premium will decrease by smaller and smaller amounts each year.________ d) Interest expense is calculated by multiplying the beginning carrying value of the bond by the stated rate of interest.________ e) Effective interest amortization can only be used on bonds that pay interest annually.

Question

What will be an ideal response?

Answer 1

a) T b) T c) F d) F e) F

a) This is true. The difference between the effective interest method and the straight-line method is that the effective interest method matches interest expense with the carrying value of the bond.
b) This is true. Because amortizing a bond issued at a discount using effective interest matches interest expense with the increasing carrying value of the bond, a company will recognize smaller amounts of interest expense in the first years of a bond's life and higher amounts in the last years. The straight-line method recognizes equal amounts every year.
c) This is false. The carrying value of a bond issued at a premium will decrease by larger and larger amounts each year as interest expense with each payment becomes smaller and smaller.
d) This is false. Interest expense using the effective interest method is equal to the carrying value at the beginning of the year multiplied by the market rate of interest, not the stated rate.
e) This is false. Effective interest amortization can be used whether interest is paid annually or semiannually.