Diaz Company issued $110,000 face value of bonds on January 1, Year 1. The bonds had a 5 percent stated rate of interest and a ten-year term. Interest is paid in cash annually, beginning December 31, Year 1. The bonds were issued at 97. The straight-line method is used for amortization. Required Use a financial statements model like the one shown below 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 companys financial statements. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, Year 1. Determine the amount of interest expense reported on the Year 1 income statement. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, Year 2. Determine the amount of interest expense reported on the Year 2 income statement.

DIAZ COMPANY

Effect of Transactions on Financial Statements

Event No.

Balance Sheet

Income Statement

Statement of Cash Flow

Assets

=

Liabilities

+

Stockholders Equity

Revenues

Expenses

=

Net Income

1.

+

=

+

+

=

+

FA

2a.

=

+

+

=

OA

2b.

=

+

+

+

=

b.	Carrying value
c.	Interest expense
d.	Carrying value
e.	Interest expense

a.	Gray Co. issued $60,000 of 6 percent bonds at 102 1/2	$1,500selected answer correct	Premiumselected answer correct
b.	Bush, Inc. issued $87,000 of 10-year, 6 percent bonds at 97 1/2.	$4,785selected answer incorrect	Discountselected answer correct
c.	Oak, Inc. issued $151,000 of 20-year, 6 percent bonds at 101.	$3,820selected answer incorrect	Premiumselected answer correct
d.	Willow Co. issued $154,000 of 15-year, 7 percent bonds at 95.	$3,740selected answer incorrect	Discountselected answer correct