You asked: What are the two methods of amortization of bonds discount premium?

Effective-interest and straight-line amortization are the two options for amortizing bond premiums or discounts. The easiest way to account for an amortized bond is to use the straight-line method of amortization.

How do you amortize a bond discount?

Amortizing Bond Discount with the Effective Interest Rate Method. When a bond is sold at a discount, the amount of the bond discount must be amortized to interest expense over the life of the bond. … This means that as a bond’s book value increases, the amount of interest expense will increase.

What does it mean to amortize a bond premium or discount?

With regards to bonds payable, the term amortize means to systematically allocate the discount on bonds payable, the premium on bonds payable, and the bond issue costs to Interest Expense over the remaining life of the bonds. … The most precise way to amortize these is to use the effective interest rate method.

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What method of amortization must companies use to amortize a bond discount or premium when reporting?

Straight line amortization is always the easiest way to account for discounts or premiums on bonds. Under the straight line method, the premium or discount on the bond is amortized in equal amounts over the life of the bond. This is best explained by example.

What are the different methods of amortization?

Amortization methods include the straight line, declining balance, annuity, bullet, balloon, and negative amortization.

When bonds are issued at a discount and the effective interest method is used for amortization at each successive interest payment date the interest expense?

When bonds are sold at a discount and the effective interest method is used, at each subsequent interest payment date, the cash paid is: Less than the effective interest. A bond is issued with a face amount of $500,000 and a stated interest rate of 10%.

Which method of amortization is better — straight line or effective interest method?

Straight line amortization is widely considered to be a simpler method of account for bond values than effective interest amortization. While straight-line amortization divides the bond’s total premium over the remaining payment periods, effective interest is used compute unique values at all points of repayment.

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.

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What are two types of amortization?

Types of Amortizing Loans

  • Auto loans. An auto loan is a loan taken with the goal of purchasing a motor vehicle. …
  • Home loans. Home loans are fixed-rate mortgages that borrowers take to buy homes; they offer a longer maturity period than auto loans. …
  • Personal loans.

What are the two types of amortization?

Amortization Schedules: 5 Common Types of Amortization

  • Full amortization with a fixed rate. …
  • Full amortization with a variable rate. …
  • Full amortization with deferred interest. …
  • Partial amortization with a balloon payment. …
  • Negative amortization.

What is the straight line method of amortization?

Straight line basis is a method of calculating depreciation and amortization, the process of expensing an asset over a longer period of time than when it was purchased. It is calculated by dividing the difference between an asset’s cost and its expected salvage value by the number of years it is expected to be used.