On January 1,2019,Tonika Company issued a four-year,$10,000,7% bond.The interest is payable annually each December 31.The issue price was $9,668 based on an 8% effective interest rate.Tonika uses the effective-interest amortization method.
-The book value of the bonds as of December 31,2019 is closest to:

Question

On January 1,2019,Tonika Company issued a four-year,$10,000,7% bond.The interest is payable annually each December 31.The issue price was $9,668 based on an 8% effective interest rate.Tonika uses the effective-interest amortization method. 
-The book value of the bonds as of December 31,2019 is closest to:

Quizplus · Accepted Answer

To solve this problem, we need to use the effective-interest amortization method to calculate the bond's interest expense and interest payable for the year ended December 31, 2019. Then, we can calculate the bond's book value as of December 31, 2019 by subtracting the total amount of interest paid from the initial bond carrying value.

First, let's calculate the bond's annual interest expense and interest payable:

Annual interest payment = $10,000 x 7% = $700
Effective interest rate = 8%
Interest expense for 2019 = $9,668 x 8% = $773.44
Interest payable as of December 31, 2019 = $700

Next, let's calculate the bond's book value as of December 31, 2019:

Initial carrying value = $9,668
Total interest paid = $700
Bond book value as of December 31, 2019 = $9,668 + $773.44 - $700 = $9,741.44

Therefore, the closest answer choice is D) $9,741.

On January 1,2019,Tonika Company Issued a Four-Year,$10,000,7% Bond