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Diaz Company issued $84,000 face value of bonds on January 1, 2018. The bonds had a...

Diaz Company issued $84,000 face value of bonds on January 1, 2018. The bonds had a 8 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

  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.

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
business   accounting   
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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
1 $82,320.00 = $82,320.00 + - = $82,320.00 FA
2a $0.00 = $6,888.00 + -$6,888.00 - $6,888.00 = -$6,888.00 $0.00 NA
2b -$6,720.00 = -$6,720.00 -$6,720.00 OA

Solution b to e:

Face value of bond = $84,000

Issue price = $84,000*98% = 82,320

Discount on issue of bond = $84,000 - $82,320 = $1,680

Annual interest payment = $84,000 * 8% = $6,720

Annual interest expense = Interest payment + Discount amortized = $6,720 + ($1,680/10) = $6,888

carrying value (face value less discount or plus premium) of the bond liability as of December 31, 2018 = $82,320 + $168

= $82,488

amount of interest expense reported on the 2018 income statement = $6,888

Carrying value (face value less discount or plus premium) of the bond liability as of December 31, 2019. = $82,488 + $168 = $82,656

amount of interest expense reported on the 2019 income statement = $6,888

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