In: Accounting
Question: In regard to a bond discount or premium, what is the effective-interest amortization
method?
Step 1: Definition of amortization
It is a process to reduce the cost of the purchased asset.
Step 2: Effective-interest amortization
This method calculates interest expense based on the current carrying amount of the bond and the market interest rate at issuance. It then amortizes the difference between the cash interest payment and calculated interest expense as a decrease in the discount or premium.
There are three methods to amortize the bonds.