Effective Interest Amortization of Premiums and Discounts The appropriate method of amortizing a premium or discount on issuance of bonds is the effective interest method. Required:
a. What is the effective interest method of amortization, and how is it different from or similar to the straight-line method of amortization?
b. How are interest and the amount of discount or premium amortization computed using the effective interest method, and why and how do amounts obtained using the effective interest method differ from amounts computed under the straight-line method?
c. Generally, the effective interest method is defended on the grounds that it provides the appropriate amount of interest expense. Does it also provide an appropriate balance sheet amount for the liability balance? Why, or why not?