Dictionary of Accounting Terms: effective interest method
effective interest method
manner of accounting for bond premiums or discounts. The interest expense equals the carrying value of a bond at the beginning of the accounting period times the effective interest rate(yield); also called scientific amortization. This method is preferredover the straight-line method of amortizing bond discount or bond premium. Amortization of a bond discount or premium is the difference between the interest expense and the nominal interest payment. The amortization entry is:
Interest Expense (effective interest rate ¥ carrying value)
Cash (nominal interest rate ¥ face value)
Bond Discount (for the difference)
