Manner of determining interest expense or interest revenue. The effective interest rate is multiplied by the carrying value of the related debt or receivable at the beginning of the accounting period. The method results in a constant rate of interest but different dollar amounts each period. It is a preferred method over the straight-line method to amortize bond discount or premium. The amount of amortization equals the difference between the debit to interest expense (effective interest rate x carrying value of bond at beginning of year) and the cash payment (nominal interest rate x face value). Assume that on 1/1/2005 a $500,000, 10% bond is issued at 94%. The effective interest rate is 12%. The computation on 12/31/2005 for the bond discount is:
