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.

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.)

Answer 1

Diaz Company Financial Statement Model Income Statement Balance Sheet Statement of Event Net Assets Liabilities Stockholder's Equity Revenue Expense Cash Flows Income Bonds payable |Discount on bonds payable (1) FA Cash 120,780 122,000 120,780 -1,220 122 Retained earnings (2) Discount on bonds payable Interest expense Cash -6,222 OA -6,100 -6,222 6,222 -6,100 Note: For transaction (2) Cash paid 122,000x5% -$6 , 100 Decrease in discount on bonds payable -1,220/10 122 +