The Theoretical Justification in Support of the Effective Interest Method

question 42

Multiple Choice

The theoretical justification in support of the effective interest method of amortizing a discount is that it represents

• A)a stable interest expense
• B)a stable interest rate
• C)an increasing balance in the discount account
• D)an increasing balance in the book value account

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Definitions:

Salvage

Salvage relates to the estimated resale or scrap value of an asset at the end of its useful life, which is considered when calculating depreciation expenses.

Erosion

The gradual reduction or depletion of an asset's value or the profitability of a business operation, often due to external factors.

Sunk Cost

A past expenditure that has already been incurred and cannot be recovered, which should not affect current or future financial decisions.

Market Value

The current price at which an asset or company can be bought or sold, determined by the supply and demand dynamics in the market.