Diaz Company issued bonds with a face value of $136,000 on January 1, Year 1. The bonds had a stated interest rate of 8 percent and a 10-year term. Interest is paid in cash annually, beginning December 31, Year 1. The bonds were issued at 96. The straight-line method is used for amortization.

Use a financial statements model 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 or for decrease. In the Statement of Cash Flows column, use the initials OA to designate operating activity, IA for investing activity, and FA for financing activity. Not all cells require input.) Show less Effect of Transactions on Financial Statements Balance Sheet Income Statement Stockholders' Liabilities + Revenue Equity Expenses Statement of Cash Flows Event No. Assets = Net Income 1. + II 2. +