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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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The result of using the effective interest method of amortization of the discount on bonds is that

  1. the cash interest payment is greater than the interest expense.
  2. the amount of interest expense decreases each period.
  3. the interest expense for each amortization period is constant.
  4. a constant interest rate is charged against the debt carrying value.

To determine

Concept introduction:

Bonds:

Bonds are debt instruments issued by the borrower company to its lenders. Bonds are issued at a specified rate of interest and for a specified time period. The bondholders get a fixed rate of interest on the bonds and repayment of the bonds at the maturity date. Bonds may be issued at a premium or discount. The premium or discount on issue of binds is amortized or the life of bonds using the straight line or effective rate methods.

To choose:

The correct Statement about discount amortization using effective interest rate method.

Explanation

Explanation for correct answer:

Under the effective interest rate method, the interest expense is calculated using the following formula:

Interest Expense = Carrying value of the bonds * Bond Yield rate * Time

Hence, the correct option is d.

Explanation for incorrect answers:

a. In case of amortization of discount, the interest expense is greater than the interest cash payment...

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