Question

Diaz Company issued $82,000 face value of bonds on January 1, 2018. The bonds had a 7 percent stated rate of interest and a ten-year term. Interest is paid in cash annually, beginning December 31, 2018. The bonds were issued at 96. The straight-line method is used for amortization.

Required

1. Use a financial statements model like the one shown below to demonstrate how (1) the January 1, 2018, bond issue and (2) the December 31, 2018, recognition of interest expense, including the amortization of the discount and the cash payment, affect the company’s financial statements.

2. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, 2018.

3. Determine the amount of interest expense reported on the 2018 income statement.

4. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, 2019.

5. Determine the amount of interest expense reported on the 2019 income statement.

Use a financial statements model like the one shown below to demonstrate how (1) the January 1, 2018, bond issue and (2) the December 31, 2018, 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, indicate whether the item is an operating activity (OA), an investing activity (IA), or a financing activity (FA) and if there is no effect, leave the cell blank.)

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	DIAZ COMPANY Effect of Transactions on Financial Statements Event No. Balance Sheet Income Statement Statement of Cash Flow Assets = Liabilities + Stockholders’ Equity Revenues − Expenses = Net Income 1. = + − = 2a. = + − = 2b. = + − =

Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, 2018.
Determine the amount of interest expense reported on the 2018 income statement.
Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, 2019.
Determine the amount of interest expense reported on the 2019 income statement.

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

Answer 1

Solution a:

Diaz Company
Financial Statement Model
Event	Balance Sheet						Income Statement					Statement of Cash Flows
	Assets	=	Liabilities		+	Stockholder's Equity	Revenue	-	Expense	=	Net Income
1	$78,720.00	=	$78,720.00	-	+			-		=		$78,720.00	FA
2a	$0.00	=	$6,068.00	-	+	-$6,068.00		-	$6,068.00	=	-$6,068.00	$0.00	NA
2b	-$5,740.00	=	-$5,740.00									-$5,740.00	OA

Solution b:

carrying value (face value less discount or plus premium) of the bond liability as of December 31, 2018 = Carrying value at beginning + Discount amortized

= $78,720 + $328 = $79,048

Solution c:

Interest expense reported on the 2018 income statement = Interest payable + Discount amortized

= ($82,000*7%) + ($3,280/10) = $,6068

Solution d:

carrying value (face value less discount or plus premium) of the bond liability as of December 31, 2019 = Carrying value at beginning + Discount amortized

= $79,048 + $328 = $79,376

Solution e:

Interest expense reported on the 2019 income statement = Interest payable + Discount amortized

= ($82,000*7%) + ($3,280/10) = $,6068