On January 1, 2014, Tonika Corporation 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. Assuming effective-interest amortization is used, the book value of the bonds as of December 31, 2014 is closest to:
A) $8,968.
B) $9,945.
C)$9,641.
D)$9,741.

Question

Quizplus · Accepted Answer

The book value of the bond is calculated by adding the interest expense (calculated using the effective interest rate) to the initial book value and then subtracting the cash interest paid. The initial book value is $9,668. The interest expense for 2014 is $9,668 * 8% = $773.44. The cash interest paid is $10,000 * 7% = $700. The new book value is $9,668 + $773.44 - $700 = $9,741.44, which is closest to $9,741.

On January 1, 2014, Tonika Corporation Issued a Four-Year, $10,000