A Theoretical Difference Between the Effective Interest Method and the Straight-Line

question 48

Multiple Choice

A theoretical difference between the effective interest method and the straight-line amortization method is that

• A)the effective interest method is easier to use
• B)the effective interest method can be used if there is a material difference in the computation when compared to the straight-line method
• C)the effective interest method produces a result that is based on a constant rate of interest
• D)the effective interest method produces a result that is based on a constant interest expense

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Definitions:

Future Value

The estimated value of an investment or a sum of money at a specific date in the future, considering a specified rate of interest or growth.

Discount Rate

The rate at which future cash flows are discounted back to their present value in DCF analysis.

Grow

To increase in size, number, or importance over a period of time.

Inherited

Received or passed down by inheritance, referring to assets, traditions, genetic traits, or conditions transferred from one generation to the next.