Question

Diaz Company issued bonds with a $116,000 face value on January 1, Year 1. The bonds had a 8 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 98. The straight-line method is used for amortization. Required a. 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.) Effect of Transactions on Financial Statements Balance Sheet Income Statement Liabilities - Stockholders Revenue - Expense - Net Income Equity Event No. Assets Cash Flow

Answer 1

Bond issue price	113680	=116000*0.98
Discount on issue	2320	=116000*(1-0.98)
Annual discount amortized	232	=2320/10
Cash interest	9280	=116000*8%
a
	Balance Sheet			Income Statement
Event	Assets	Liabilities	Stockholders' Equity	Revenue	Expense	Net income	Cash flows
1	113680	113680	NA	NA	NA	NA	113680	FA
2	-9280	232	-9512	NA	9512	-9512	-9280	OA
b Carrying value	113912	=113680+232
c Interest expense	9512	=9280+232
d Carrying value	114144	=113912+232
e Interest expense	9512	=9280+232