Question

If bonds are issued initially at a premium and the effective-interest method of amortization is used, what will be true of interest expense in the earlier years?

a) Interest expense will decrease in the earlier years.
b) Interest expense will remain constant in the earlier years.
c) Interest expense will increase in the earlier years.
d) Interest expense will not be recorded in the earlier years.

Answer 1

If bonds are issued initially at a premium and the effective-interest method of amortization is used, the interest expense will decrease in the earlier years.

Step-by-step explanation:

If bonds are issued initially at a premium and the effective-interest method of amortization is used, the interest expense will decrease in the earlier years.

The effective-interest method of amortization allocates the premium or discount on the bonds over the life of the bonds, using the effective interest rate. In the case of bonds issued at a premium, the premium amount is subtracted from the interest expense each year, resulting in a lower interest expense in the earlier years.

Therefore, option a) Interest expense will decrease in the earlier years is correct.