Question

Diaz Company issued $122,000 face value of bonds on January 1, 2018. The bonds had a 5 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 99. The straight-line method is used for authorization.

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.

Answer 1

Solution a:

Issue price of bonds = $122000*99% = $120,780

Discount on bond payable = 122000 - $120780 = $1,220

Discount amortization annually = $1220/ 10 = $122

carrying value of the bond liability as of December 31, 2018 = Issue price + Discount amortized = $120780 + $122 = $120,902

Solution 2:

Annual payment of cash for interest = $122000*5% = $6,100

interest expense reported on the 2018 income statement = Cash interest + Discount amortization

= $6100 + $122 = $6,222

Solution c:

carrying value of the bond liability as of December 31, 2018 = Carrying value on Dec 31,2018 + Discount amortized = $120902 + $122 = $121,024

Solution d:

Interest expense reported on the 2019 income statement = $6,222