Chapter 5- Effective Interest Method
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Discount on ______, ________, and ______ shal be amortized using effective interest method.
- bonds payable
- premium on bonds payable
- bond issue cost
What is an effective rate?
An effective rate is the rate that exactly discounts estimated cash future payments through the expected life of the bonds payable or when appropriate, a shorter period to the net carrying amount of the bonds payable.
When effective rate < nominal rate, there is a ________
When effective rate > nominal rate, there is a __________.
How do you solve for the interest paid?
Face value x nominal rate x time
How do you solve for the interest expense?
carrying amount xeffective rate x time
How do you solve for the discount or premium amortization?
- Premium: int. paid - int. expenses
- Discount: int. expenses- int. paid
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