On January 1, 2016, 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, 2016 is closest to:

Question

Quizplus · Accepted Answer

First, we need to calculate the annual interest payment:
$10,000 x 7% = $700

Then, we need to calculate the interest expense using the effective-interest amortization method:
Year 1:
Interest expense = $9,668 x 8% = $773.44
Discount amortization = $773.44 - $700 = $73.44
Book value = $9,668 + $73.44 = $9,741.44

Therefore, the book value of the bonds as of December 31, 2016, is closest to $9,741 (answer D).

On January 1, 2016, Tonika Company Issued a Four-Year, $10,000