Which of the following accurately describes the effective interest method of amortization?

The effective interest method of amortization is based on the market interest rate at the time of purchase. This method calculates the amortization of bond premiums and discounts by multiplying the carrying amount of the bond by the market interest rate (the effective interest rate) at each period. This results in different amounts of interest expense being recognized in each period, reflecting the time value of money more accurately than other methods.

Using the effective interest method, the amortization amount changes as the carrying amount of the bond changes over time, aligning the expense recognition with the market rate of interest, rather than applying a consistent amount over the bond's life or ignoring important factors. This method is particularly beneficial for investors and companies as it provides a more realistic view of the cost of borrowing or the yield on an investment.