Diaz Company issued $101,000 face value of bonds on January 1,2018. The bonds had a 8 percent stated rate of interest and aten-year term. Interest is paid in cash annually, beginningDecember 31, 2018. The bonds were issued at 99. The straight-linemethod is used for amortization.
Required
Use a financial statements model like the one shown below todemonstrate how (1) the January 1, 2018, bond issue and (2) theDecember 31, 2018, recognition of interest expense, including theamortization of the discount and the cash payment, affect thecompany’s financial statements.
Determine the carrying value (face value less discount or pluspremium) of the bond liability as of December 31, 2018.
Determine the amount of interest expense reported on the 2018income statement.
Determine the carrying value (face value less discount or pluspremium) of the bond liability as of December 31, 2019.
Determine the amount of interest expense reported on the 2019income statement.
