Question

Diaz Company issued $180,000 face value of bonds on January 1, 2018. The bonds had a 7 percent stated rate of interest and a five-year term. Interest is paid in cash annually, beginning December 31, 2018. The bonds were issued at 98. 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, 2018, bond issue and (2) the December 31, 2018, recognition of interest expense, including the amortization of the discount and the cash payment, affect the company’s financial statements. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, 2018. Determine the amount of interest expense reported on the 2018 income statement. Determine the carrying value (face value less discount or plus premium) of the bond liability as of December 31, 2019. Determine the amount of interest expense reported on the 2019 income statement.

Answer 1

Answer:

Issuance:

Balance sheet:

Assets and liabilities increase y 198,000

Net Income: no effect

Cash flow: financing activities: 198,000

1st payment

The interest expense will be the sum of both, the cash proceeds and the discount amortization.

13,860 + 792 =   14,652 interest expense

Balance sheet:

Assets decrease by 13,860 (cash)

Liabilities increase by 792 (as the carrying value of the bon increase)

Net Income: 14,652 interest expense

Cash flow: financing activities: (13,860)

Carrying value

194,040 + 792 = 194,832

Interest expense 2019:

same as before as we use striagh line method:

cash proceeds + amortization

13,860 + 792 =   14,652 interest expense

Explanation:

face value                       198,000

proceeds                       194,040

discount on bonds payable  3,960

amortization:

3,960 / 5 = 792

cash proceeds: 198,000 x 0.07 = 13,860