Diaz Company issued bonds with a face value of $142,000 on January 1, Year 1. The bonds had a stated interest rate of 6 percent and a 10-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

a. 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 companys financial statements. b. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, Year 1. c. Determine the amount of interest expense reported on the Year 1 income statement. d. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, Year 2. e. Determine the amount of interest expense reported on the Year 2 income statement.

Effect of Transactions on Financial Statements

Balance Sheet

Income Statement

Statement of Cash Flows

Event No.

Assets

=

Liabilities

+

Stockholders Equity

Revenue

Expenses

=

Net Income

1.

=

+

=

2.

=

+

=

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