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Diaz Company issued $80,000 face value of bonds on January 1, 2018. The bonds had a...

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Accounting

Diaz Company issued $80,000 face value of bonds on January 1,2018. The bonds had a 6 percent stated rate of interest and aten-year term. Interest is paid in cash annually, beginningDecember 31, 2018. The bonds were issued at 98. The straight-linemethod is used for amortization. Required a. Use a financialstatements 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 thediscount and the cash payment, affect the company’s financialstatements. Use + for increase, ? for decrease, and NA for notaffected. b. Determine the carrying value (face value less discountor plus premium) of the bond liability as of December 31, 2018. c.Determine the amount of interest expense reported on the 2018income statement. d. Determine the carrying value (face value lessdiscount or plus premium) of the bond liability as of December 31,2019. e. Determine the amount of interest expense reported on the2019 income statement.

Answer & Explanation Solved by verified expert
3.8 Ratings (395 Votes)

Ques 1
Balance sheet Income statement
Event Assets Liabilties equity revenue expenses net income Cash flow
1 + + NA NA NA NA + FA
2 - + - NA + - - OA
Ques 2
Discount on bonds 1600
80000*0.02
amortization of bond discount year 1 160
1600/10
carying value december 31
Bonds payable 80000
Less:discount on bonds payable 1440
(1600-160)
Carrying value 78560
ques 3
interest expense
stated interest 4800
80000*0.06
Amortization of bond discount 160
interest expense 4960
Ques 4
carying value december 31
Bonds payable 80000
Less:discount on bonds payable 1280
(1600-160*2)
Carrying value 78720
Ques 5
interest expense
stated interest 4800
80000*0.06
Amortization of bond discount 160
interest expense 4960

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