Chapter 6 - Effective Interest Method Flashcards
Also known as scientific method or simply “interest method”
Effective interest method
The effective interest distinguishes two kinds of interest rate, namely the _____ and _____.
Nominal rate
Effective rate
The nominal rate is the COUPON or _____.
Stated Rate
The effective rate is the YIELD or _____.
Market rate
The rate that exactly discounts estimated cash future payments through the expected life of the bonds payable or when appropriate,ma shorter period to the net carrying amount of the binds payable.
Effective rate
When the binds are sold at _____, the effective rate and the nominal rate are the same.
Face value
When the bonds are sold at _____ or _____, the effective rate and the nominal rate differ.
Discount or premium
When the binds are sold at _____, the effective rate is lower than the nominal rate.
Premium
When the binds are sold at a _____, the effective rate is higher than the nominal rate.
Discount
Under the effective interest method, the ______ is determined by multiplying the EFFECTIVE RATE BY THE CARRYING AMOUNT OF THE BONDS.
Effective interest expense
The carrying amount of the bonds changes _____ as the amount of premium or discount is amortized periodically.
Every year
The effective interest is then compared with the nominal interest. The difference is the premium or discount amortization.
The premium amortization is computed as follows:
Nominal interest (nominal rate x face value) Less: Effective interest (effective rate x carrying amount)
Premium amortization
The discount amortization is computed as follows:
Effective interest
Less: Nominal interest
Discount amortization
The carrying amount is actually the _____ contemplated in the standard.
Amortized cost
R: note that the payment of the semiannual interest and the periodic amortization of the discount are compounded in one entry. The two items can be separately recorded.
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