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. Rounding calculations to the nearest whole dollar, which of the following journal entries correctly records the 2016 interest expense?

A. Interest expense 700

Cash 700

B. Interest expense 883

Discount on bonds payable 183

Cash 700

C. Interest expense 773

Discount on bonds payable 73

Cash 700

D. Interest expense 676

Discount on bonds payable 24

Cash 700

a. Option A

b. Option B

c. Option C

d. Option D

Question

Business

Kira Lin

27 November, 01:39

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. Rounding calculations to the nearest whole dollar, which of the following journal entries correctly records the 2016 interest expense?

A. Interest expense 700

Cash 700

B. Interest expense 883

Discount on bonds payable 183

Cash 700

C. Interest expense 773

Discount on bonds payable 73

Cash 700

D. Interest expense 676

Discount on bonds payable 24

Cash 700

a. Option A

b. Option B

c. Option C

d. Option D

+1

Answers (1)

Know the Answer?

Jovanni Garrett · Answer 1

Option C is correct one.

Interest expense 773

Discount on bonds payable 73

Cash 700

Explanation:

2016 interest expense = initial issue price, which is the 1/1/2014 book value x the market (effective) interest rate

= $9,668 x 08

= $773

Cash interest payment

= maturity value of the bond x the stated interest rate = $10,000 x. 07

= $700

Amortization of discount on bonds payable

= interest expense - interest cash payment

= $773 - $700.

= $73