The December 31,2020 book value after the December 31,2020 interest payment was made is closest to:

A) $9,662.
B) $9,820.
C) $9,668.
D) $9,723.

Question

The December 31,2020 book value after the December 31,2020 interest payment was made is closest to:A) $9,662.B) $9,820.C) $9,668.D) $9,723.

Pablo Kodak · Accepted Answer

Final Answer : B, Explanation :  First, we need to calculate the annual interest payment.Annual interest payment = $10,000 × 7% = $700Next, we need to calculate the amortization of the bond discount for the second year.Effective interest rate = 8%Discount amortization for the second year = $9,668 × 8% = $773.44Book value at the beginning of the second year = $9,668 + $773.44 = $10,441.44Subtracting the annual interest payment of $700, the book value at the end of the second year is:Book value at the end of the second year = $10,441.44 - $700 = $9,741.44Finally, we need to calculate the amortization of the bond discount for the third year.Effective interest rate = 8%Discount amortization for the third year = $9,741.44 × 8% = $779.32Book value at the beginning of the third year = $9,741.44 + $779.32 = $10,520.76Subtracting the annual interest payment of $700, the book value at the end of the third year is:Book value at the end of the third year = $10,520.76 - $700 = $9,820.76Since the answer choices are rounded to the nearest dollar, the closest answer is B) $9,820.

The December 31,2020 book value after the December 31,2020 interest payment was made is closest to:

A) $9,662.
B) $9,820.
C) $9,668.
D) $9,723.

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