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 December 31,2020 book value after the December 31,2020 interest payment was made is closest to:

Question

Quizplus · Accepted Answer

First, we need to calculate the annual interest payment.
Annual interest payment = $10,000 × 7% = $700

Next, we need to calculate the amortization of the bond discount for the second year.
Effective interest rate = 8%
Discount amortization for the second year = $9,668 × 8% = $773.44

Book value at the beginning of the second year = $9,668 + $773.44 = $10,441.44

Subtracting the annual interest payment of $700, the book value at the end of the second year is:
Book value at the end of the second year = $10,441.44 - $700 = $9,741.44

Finally, we need to calculate the amortization of the bond discount for the third year.
Effective interest rate = 8%
Discount amortization for the third year = $9,741.44 × 8% = $779.32

Book value at the beginning of the third year = $9,741.44 + $779.32 = $10,520.76

Subtracting the annual interest payment of $700, the book value at the end of the third year is:
Book value at the end of the third year = $10,520.76 - $700 = $9,820.76

Since the answer choices are rounded to the nearest dollar, the closest answer is B) $9,820.

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