What is the interest method of amortization?
Herein, which method of amortization is better -- straight line or effective interest method Why?
In short, the effective interest rate method is more logical than the straight-line method of amortizing bond premium. The effective interest rate is multiplied times the bond's book value at the start of the accounting period to arrive at each period's interest expense.
Subsequently, question is, what are the two methods of amortization of bonds discount premium? If the company uses the amortized cost approach to measure a long-term debt, it can use two methods to amortize the discount and the premium: the effective interest rate method, or. the straight-line method (allowed only under U.S. GAAP).
Herein, what is amortized interest?
Amortization is the process of spreading out a loan into a series of fixed payments over time. You'll be paying off the loan's interest and principal in different amounts each month, although your total payment remains equal each period. The interest costs (what your lender gets paid for the loan).
Why do we amortize bonds?
In this way, an amortized bond is used specifically for tax purposes because the amortized bond discount is treated as part of a company's interest expense on its income statement. The interest expense, a non-operating cost, reduces a company's earnings before tax (EBT) and, therefore, the amount of its tax burden.