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Financial Assets at FV Option

The effective interest method amortizes bond discount and premium by comparing the interest earned using the effective rate to the interest received using the nominal rate, with the difference representing the discount or premium amortization, and adjusting the carrying amount of the bond investment accordingly.

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Christine Jane Abang
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9 views

Financial Assets at FV Option

The effective interest method amortizes bond discount and premium by comparing the interest earned using the effective rate to the interest received using the nominal rate, with the difference representing the discount or premium amortization, and adjusting the carrying amount of the bond investment accordingly.

Uploaded by

Christine Jane Abang
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Explain the effective interest method of amortizing bond discount and bond premium

The effective interest method simply requires the comparison between the interest earned or interest
income and the interest received.
The difference between the two represents the premium or discount amortization.
Interest earned or interest income is computed by multiplying the effective rate by the varying amount
of the bond investment. Interest received is computed by multiplying the nominal rate by the face
amount of the bond. The carrying amount of band investment is the initial cost gradually increased by
periodic amortization of discount or gradually in decrease by periodic amortization of premium

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