Question

Which of the following statements regarding the amortization of discounts and premiums on bonds is false?

Group of answer choices

a. Over the life of the bond, the carrying value increases for discounted bonds when using the effective interest method.

b. When the straight-line and effective interest methods of amortization result in interest that is materially different, GAAP requires use of the effective interest method.

c. The amount of interest expense increases each period over the life of a discounted bond issue when the effective interest method is used.

d. None of these statements is false.

e. The effective interest method applies a non-constant percentage to the bond carrying value to compute interest expense.

Answer 1

The effective interest method applies a non-constant percentage to the bond carrying value to compute interest expense is False.

The effective interest method applies a constant percentage which is the market rate at date of issuance to the bond carrying value

Over the life of the bond, the carrying value increases for discounted bonds and the amount of interest expense increases each period as interest expense is calculated by multiplying market rate by Carrying value of bonds.

GAAP requires use of the effective interest method when the straight-line and effective interest methods result in materially different interest amounts.

Option E is correct