Final answer:
The cash payment for interest under the effective-interest method is calculated by multiplying the carrying value of the bonds by the effective-interest rate. Examples include a two-year bond with a face value of $3,000 at 8% interest and the effects of rising market interest rates on the value of bonds. The correct option is d.
Step-by-step explanation:
Under the effective-interest method of amortization, the cash payment on each interest payment date is calculated by multiplying the carrying value of the bonds times the effective-interest rate for the appropriate time period, which makes the correct answer (d).
This method reflects the actual economic interest earned or incurred on the bond. The carrying value is the amount at which the bond is recorded on the balance sheet, which equals the face value adjusted for any unamortized premium or discount. The effective-interest rate is the rate used to discount the bonds' cash payments to their present value at issuance.
Using the example of a two-year bond with a face value of $3,000 and a stated interest rate of 8%, the bond would pay $240 in interest each year. If the discount rate is also 8%, the present value of these cash flows would be equal to the face value.
However, if the discount rate rises to 11%, the present value of the bond will decrease because future cash payments are discounted more heavily. The correct option is d.