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Diaz Company issued bonds with a $127,000 face value on January 1, Year 1. The bonds...

Diaz Company issued bonds with a $127,000 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 97. The straight-line method is used for amortization. Requireda. 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.) 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.

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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
Cash = Bond Payable - Discount on issue of bond + Retained Earnings
1 $123,190.00 = $127,000.00 - $3,810.00 + - = $123,190.00 FA
2 -$8,890.00 = - -$381.00 + -$9,271.00 - $9,271.00 = -$9,271.00 -$8,890.00 OA

Solution b:

Carrying value on December 31, year 1 = $123,190 + $381 = $123,571

Solution c:

Amount of interest expense reported on the Year 1 income statement = $9,271

Solution d:

Carrying value (face value less discount or plus premium) of the bond liability as of December 31, Year 2 = $123,571 + $381 = $123,952

Solution e:

Amount of interest expense reported on the Year 2 income statement = $9,271

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