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On January 1, 2016, Tonika Company issued a six-year, $10,000, 10% bond. The interest is payable...

On January 1, 2016, Tonika Company issued a six-year, $10,000, 10% bond. The interest is payable annually each December 31. The issue price was $9,577 based on an 11% effective interest rate. Tonika uses the effective-interest amortization method. The book value of the bonds as of December 31, 2016 is closest to: rev: 10_08_2016_QC_CS-64487

$9,524.

$9,630.

$53.

$8,577.

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Answer #1

Face Value = $10,000
Proceed from Issue = $9,577

Discount on Issue = Face Value - Proceed from Issue
Discount on Issue = $10,000 - $9,577
Discount on Issue = $423

Annual Coupon Rate = 10%
Annual Coupon = 10%*$10,000
Annual Coupon = $1,000

Interest Expense for 2016 = 11% * $9,577
Interest Expense for 2016 = $1,053

Amortization of Discount = $1,053 - $1,000
Amortization of Discount = $53

Book Value of Bonds on December 31, 2016 = $9,577 + $53
Book Value of Bonds on December 31, 2016 = $9,630

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