Compare and contrast the straight line method and the effective interest rate method of amortization. Defend or critique FASBâ€™s position on the reasons why the effective interest rate method is the preferred method for amortizing a discount or premiu

Below is a comparison
of the amount of interest expense reported under the effective interest rate
method and the straight-line method. Note that under the effective interest
rate method the interest expense for each year is decreasing as the book value
of the bond decreases. Under the straight-line method the interest expense
remains at a constant annual amount even though the book value of the bond is
decreasing. The accounting profession prefers the effective interest rate
method, but allows the straight-line method when the amount of bond premium is
not significant.

Notice that under both
methods of amortization, the book value at the time the bonds were issued
($104,100) moves toward the bond's maturity value of $100,000. The reason is
that the bond premium of $4,100 is being amortized to interest expense over the
life of the bond.