Defend or critique FASB position on the reasons why the effective interest rate

Accounting
Tutor: None Selected Time limit: 1 Day

Defend or critique FASB’s position on the reasons why the effective interest rate method is the preferred method for amortizing a discount or premium. Justify your response.

Aug 26th, 2015

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The preferred method for amortizing the bond premium is the effective interest rate method or the effective interest method. Under the effective interest rate method the amount of interest expense in a given year will correlate with the amount of the bond's book value. This means that when a bond's book value decreases, the amount of interest expense will decrease, if the book value increases, so too will the amount of related interest. In short, the effective interest rate method is more logical than the straight-line method of amortizing bond premium and discounts

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Aug 26th, 2015

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