Question

On January 1, 2016, Tonika Company issued a five-year, $10,000, 9% bond. The interest is payable annually each December 31. The issue price was $9,621 based on an 10% effective interest rate. Tonika uses the effective-interest amortization method. The book value of the bonds as of December 31, 2016 is closest to:

Answer 1

Answer:

A) Interest Expense is $577.6

B) $9683

Explanation:

Given data:

Issued amount $10,000 at 9%

a.

Interest Expense = $9,621 × 6%

                            = $577.6

Interest Expense is $577.6

b.

The book value of the bonds as of December 31, 2016 is calculated in excel and screen shot provided below:

par value of bond is $10,000

coupon rate 9%

Annual coupon payment $[10,000\times 0.09 = 900]$

time of year remaining 5 year

YTM 10%

INTEREST expense for 2016 $= rate \times book\ value \at\ jan\ 1$

                                                $= 10\ percent \times 9621 = 962$

Ammortization of bond discount = 962 - 900 = 62

Book value of bond on 31 dec 2016 = 9621 + 62 = $9683

Answer 2

The book value of the bonds as of December 31, 2016 is closest to:$9,683.

Book value

a. Interest Expense

Interest expense= $9,621 × 6%

Interest expense=$577.6

b. Book value

Amortization bond discount=(10%×$9,621)-(9%×$10,000)

Amortization bond discount =$962 - $900

Amortization bond discount  =$62

Book value =$9621 + $62

Book value= $9683

Inconclusion the book value of the bonds as of December 31, 2016 is closest to:$9,683.

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