Question

When the effective interest method is used, the amortization of the bond premium 0 has no effect on the interest expense in any period O decreases interest expense each period Oincreases interest expense each period 0 increases interest expense in some periods and decreases interest expense in other periods

Answer 1

Answer

• The correct answer is Option #2 decreases interest expense each period.
• This is because the question asks about amortisation of Bonds PREMIUM.
• When Bonds are issued at Premium, their carrying value is maximum in first year, which decreases after every amortisation at interest payment.
• Under effective interest method, Interest expense is calculated using market rate on Carrying value of Bonds.
• Since carrying value of bonds tend to decrease overtime, the Interest expense calculated on it will also DECREASES.