Question: This bond was sold at the present value of its future cash flows based on a rate of interest negotiated
by the parties involved. Interest was then recognized periodically by applying the effective rate method. Is the
effective rate method the only acceptable technique that can be used to compute and report interest when the face
value of a debt differs from its issue price?
Answer: Interest can also be calculated for reporting purposes by a simpler approach known as the straight-line
method. Using this technique, an equal amount of the discount is assigned to interest each period over the life of
the bond. This zero-coupon bond was sold for $2,200 below face value to provide interest to the buyer. Payment
will be made in two years. The straight-line method simply recognizes interest of $1,100 per year ($2,200/2 years).