What method is used for amortizing the discount over the term of a bond?

The effective interest method is used for amortizing the discount over the term of a bond because it reflects a more accurate representation of the cost of borrowing over time compared to the other methods. This approach allocates interest expense based on the carrying amount of the bond at the beginning of each period and the market interest rate at the time the bond was issued.

When a bond is issued at a discount, the difference between the face value and the issue price represents an additional cost to the issuer that must be amortized. Under the effective interest method, the interest expense recognized in each period increases as the carrying amount of the bond rises due to the amortization of the discount. This method aligns more closely with the accrual basis of accounting, ensuring that interest costs are matched with the periods they help finance.

In contrast, the straight-line method allocates an equal amount of the discount to each period without considering changes in the carrying amount of the bond. While simpler, it may not provide as accurate a picture of the interest expense over the life of the bond. The simple interest method is not applicable here because it does not account for the complexity of bond discounts. The decreasing balance method generally relates to depreciation or amortization of assets rather than to bond discounts. Thus