Question

On January 1, 2019, Tonika Company issued a seven-year, $10,000, 7% bond. The interest is payable annually each December 31. The issue price was $9,479 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:

a.$668.
b.$763.
c.$664.
d.$700.

Answer 1

Answer:

b. $763

Explanation:

Tonika Company will pay interest amount of $763 for the year December 31, 2020. The carrying value of bond = $9479 and discount amortized in 2019 is 521. The interest expense for the year 2020 will be calculated using the effective interest rate. The effective interest rate is the real rate of interest payment after incorporating the compounding effect. The interest payment using the effective interest rate is $763 ($9,479 * 8%)