Question

If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will:________

a. exceed what it would have been had the effective-interest method of amortization been used.
b. be less than what it would have been had the effective-interest method of amortization been used.
c. be the same as it would have been had the effective-interest method of amortization been used.
d. be less than the stated (nominal) rate of interest.

Answer 1

Answer: a. exceed what it would have been had the effective-interest method of amortization been used.

Explanation:

If the effective - interest method of amortization is used, the interest expense in earlier years will be lower because the amortised amount used in the calculation of bond interest will be lower.

In contrast, straight-line apportions the amortised amount evenly across all the years so in earlier years the interest will be higher than using the effective-interest method.