Which method of amortization for bond premium is permitted under US GAAP?

The correct method of amortization for bond premium permitted under US GAAP is the effective interest method, although the straight-line method is also permissible for bond premiums in certain circumstances.

When bonds are issued at a premium, it means that they were sold for more than their face value. The amortization of this premium reduces the interest expense on the income statement over the life of the bond. The effective interest method allocates the premium amortization based on the bond’s carrying amount at the beginning of each period and the effective interest rate. This method provides a more accurate reflection of the interest expense associated with the bond.

Under US GAAP, entities have the option to use the straight-line method for amortization, which equally distributes the amortization amount over the life of the bond. However, the effective interest method is generally preferred as it more accurately matches the bond expense to the periods in which the interest is incurred.

While other methods may exist in accounting practices, they are not applicable under US GAAP specifically for bond premium amortization. Therefore, the straight-line method is sometimes accepted but is not the most widely used or recommended under current guidelines for bond premium amortization, reinforcing the rationale for the effective interest method as a preferable approach in most scenarios.