There Are Two Methods for Amortizing Premiums and Discounts on the Sale

question 20

Multiple Choice

There are two methods for amortizing premiums and discounts on the sale of bonds.The differences between the two methods are:

• A) Both methods charge a constant amount of interest to the financial statements each year; however, the effective interest method charges a larger total amount of interest expense over the life of the bond.
• B) The effective interest method charges a different interest expense each year while the straight-line method results in a constant amount of expense each year.
• C) There are no differences between the two methods.
• D) None of these answers are correct.

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Definitions:

Stockholders' Equity

The ownership stake of shareholders in a corporation, which is the value left over from the assets after liabilities have been taken out.

Treasury Stock

Shares that were issued and later reacquired by the company, reducing the amount of outstanding stock.

Par Common Stock

The nominal value assigned to share of common stock, as specified in the corporate charter, which represents the minimum price shares can be issued.

Cost Method

An accounting method used to value investments, where the investment is recorded at its acquisition cost without recognizing any changes in market value.