Lopez Company issued $101,000 face value of bonds on January 1, Year 1. The bonds had a 6 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 96. The straight-line method is used for amortization.

Required

1. 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.

2. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, Year 1.

3. Determine the amount of interest expense reported on the Year 1 income statement.

4. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, Year 2.

5. Determine the amount of interest expense reported on the Year 2 income statement.

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. (Use + for increase, for decrease and if the element is not affected, leave the cell blank. In the Cash Flow column, indicate whether the item is an operating activity (OA), an investing activity (IA), or a financing activity (FA) and if there is no effect, leave the cell blank. Not all cells will require entry.)

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.

=

+

=

2a.

=

+

=

2b.

=

+

=