Question

The effective interest method is preferred when amortizing bond premiums and discounts.

1) True
2) False

Answer 1

The effective interest method is preferred when amortizing bond premiums and discounts.

Step-by-step explanation:

The statement that the effective interest method is preferred when amortizing bond premiums and discounts is True.

The effective interest method is a way of allocating the interest expense over the term of a bond. This method takes into account the time value of money and calculates the interest expense based on the effective interest rate. It is considered more accurate than the straight-line method, which spreads the interest expense evenly over the bond's term.

For example, let's say a company issues a bond with a premium. Using the effective interest method, the company would allocate a larger portion of the interest expense in the early years of the bond, when the effective interest rate is higher, and a smaller portion in the later years, when the effective interest rate is lower. This better reflects the actual cost of borrowing for the company.