On January 1,2010,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,what is the 2011 interest expense (to the nearest dollar)?
A)$779
B)$796
C)$677
D)$700

Question

Quizplus · Accepted Answer

2010 interest expense ($773) = Initial issue price, which is the 1/1/2010 book value ($9,668) F1F1F1S1F1F1F10 Market (effective) interest rate (.08).Cash interest payment ($700) = Maturity value of the bond ($10,000) F1F1F1S1F1F1F10 Stated interest rate (.07)Discount on bonds payable amortization ($73) = Interest expense ($773) - Interest cash payment ($700).December 31, 2010 book value ($9,741) = January 1, 2010 book value ($9,668) + Discount on bonds payable amortization ($73).2011 interest expense ($779) = 12/31/2010 book value ($9,741) F1F1F1S1F1F1F10 Market (effective) interest rate (.08).

On January 1,2010,Tonika Corporation Issued a Four-Year,$10,000,7% Bond