Question

Diaz Company issued $80,000 face value of bonds on January 1, 2018. The bonds had a 6 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 98. The straight-line method is used for amortization. Required a. 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. b. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, 2018. c. Determine the amount of interest expense reported on the 2018 income statement. d. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, 2019. e. Determine the amount of interest expense reported on the 2019 income statement.

Answer 1

Ques 1
	Balance sheet			Income statement
Event	Assets	Liabilties	equity	revenue	expenses	net income	Cash flow
1	+	+	NA	NA	NA	NA	+	FA
2	-	+	-	NA	+	-	-	OA
Ques 2
Discount on bonds	1600
80000*0.02
amortization of bond discount year 1	160
1600/10
carying value december 31
Bonds payable	80000
Less:discount on bonds payable	1440
(1600-160)
Carrying value	78560
ques 3
interest expense
stated interest	4800
80000*0.06
Amortization of bond discount	160
interest expense	4960
Ques 4
carying value december 31
Bonds payable	80000
Less:discount on bonds payable	1280
(1600-160*2)
Carrying value	78720
Ques 5
interest expense
stated interest	4800
80000*0.06
Amortization of bond discount	160
interest expense	4960