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Financial Accounting Effective Interest Rates

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1) Why do we use the effective interest rate rather than the stated rate when discounting the loan?

2) Why do we expense organization costs when they will benefit future periods?

3) Why you can either expense or treat advertising costs as a prepaid item?

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The expert examines effective interest rates for financial accounting.

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1) Why do we use the effective interest rate rather than the stated rate when discounting the loan?

The effective interest is the actual rate of interest that is earned on the loan. The effective interest rate takes into consideration that the duration, of a loan, may last over many years. If the stated yearly interest rate is used in discounting there is the possibility that the loan payments may be understated.

The effective interest takes into consideration the total interest that must be paid over the lifespan of the loan. The effective interest rate is used to take ...

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