Up to this point, we’ve used the straight-line method to amortize a discount or premium. A more compli
cated method of amortization is the effective interest method. Because of its greater theoretical justification, he accounting profession has required the use of this method unless the straight-line approach provides results hat are not significantly different.
cated method of amortization is the effective interest method. Because of its greater theoretical justification, he accounting profession has required the use of this method unless the straight-line approach provides results hat are not significantly different.
To calculate the periodic amortization, it is helpful to set up an amortization table.
A company issues a 4-year, $100,000 bond with a contract rate of 8% payable semiannually (4%). The market rate is The physical interest paid each period—4% of $100,000.
True interest expense—the market rate of 5% times the book value.
Amortization changes from period to period, unlike the straight-line method, which provides a constant amount.
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