Question

Exercise 10-14A Straight-line amortization of a bond discount LO 10-4

Diaz Company issued bonds with a $146,000 face value on January 1, Year 1. The bonds had a 7 percent stated rate of interest and a 10-year term. Interest is paid in cash annually, beginning December 31, Year 1. The bonds were issued at 98. The straight-line method is used for amortization.

Required
a. Use a financial statements model like the one shown next to demonstrate how (1) the January 1, Year 1, bond issue and (2) the December 31, Year 1, recognition of interest expense, including the amortization of the discount and the cash payment, affect the company’s financial statements. Use + for increase, – for decrease, and NA for not affected. (In the Cash Flow column, use the initials OA to designate operating activity, IA for investing activity, and FA for financing activity. Leave no cells blank - be certain to select "NA" wherever required.)

	Effect of Transactions on Financial Statements Balance Sheet Income Statement Cash Flow Event No. Assets = Liabilities + Stockholders’ Equity Revenue − Expense = Net Income 1. = + − = 2. = + − =

b. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, Year 1.
c. Determine the amount of interest expense reported on the Year 1 income statement.
d. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, Year 2.
e. Determine the amount of interest expense reported on the Year 2 income statement.

	b. Carrying value c. Interest expense d. Carrying value e. Interest expense

Answer 1