Final answer:
The effective-interest method is preferred over the straight-line method in accounting because it produces a more accurate representation of the actual interest incurred over time.
Step-by-step explanation:
In accounting, the effective-interest method is used to calculate interest expense on bonds and other debt instruments. This method is preferred over the straight-line method because it produces a more accurate representation of the actual interest incurred over time. Unlike the straight-line method, which assumes the interest expense is constant over the life of the bond, the effective-interest method takes into account the changing outstanding balance of the bond and applies a varying interest rate. This ensures that the interest expense recognized each period reflects the economic reality of the bond's financing cost. For example, let's say a company issued a $1,000 bond with a 5% annual interest rate. Using the straight-line method, the company would recognize $50 of interest expense every year. However, using the effective-interest method, the interest expense would be higher in the early years when the outstanding balance is higher, and lower in the later years when the outstanding balance is lower.