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How do you amortize effective interest method?

How do you amortize effective interest method?

When using the effective interest method, the debit amount in the discount on bonds payable is moved to the interest account. Therefore, the amortization causes interest expense in each accounting period to be higher than the amount of interest paid during each year of the bond’s life.

Which method of amortization is better — straight line or effective interest method?

Straight line amortization is widely considered to be a simpler method of account for bond values than effective interest amortization. While straight-line amortization divides the bond’s total premium over the remaining payment periods, effective interest is used compute unique values at all points of repayment.

How do you calculate bond amortization?

Amortization = (Bond Issue Price – Face Value) / Bond Term For an annual reporting of a five-year bond, this would be five. If you calculate it monthly, divide the discount by 60 months. The amortized cost would be $600 per year, or $50 per month.

Is amortization always straight line?

Straight line amortization is always the easiest way to account for discounts or premiums on bonds. Under the straight line method, the premium or discount on the bond is amortized in equal amounts over the life of the bond. This is best explained by example.

What is amortization and accretion of a bond?

Amortization or accretion calculations are used to adjust the cost basis from the purchase amount to the expected redemption amount. This spreads out the gain or loss over the remaining life of the bond instead of recognizing the gain or loss in the year of the bond’s redemption.

What is amortized value?

Amortized value is the recorded amount of a security, adjusted for any applicable amortization of premium or discount.

What is the effective interest method of amortization and how is it different from or similar to the straight-line method of amortization?

The effective interest method of amortizing a bond is considered superior to the straight-line amortization method simply because it is more accurate, from period to period, than the straight-line method, under which the same amount is amortized during every period.

Which statement is correct when the effective interest method is used to amortize bond premium or discount?

The correct answer is d) increase the bonds were issued at either a discount or a premium. The effective interest method is used to discount on…

When bonds are issued at a discount and the effective interest method is used for amortization at each successive interest payment date the interest expense?

When bonds are sold at a discount and the effective interest method is used, at each subsequent interest payment date, the cash paid is: Less than the effective interest. A bond is issued with a face amount of $500,000 and a stated interest rate of 10%.