The appropriate method of amortizing a premium or discount on issuance of bonds is the effective interest method.

Required:

1. What is the effective interest method of amortization, and how is it different from and similar to the straight-line method of amortization?

2. Explain how a company computes amortization using the effective interest method and why and how amounts obtained using the effective interest method differ from amounts computed under the straight-line method.