Diaz Company issued $\backslash (\backslash$$ $180,000\backslash )$ face value of bonds on January $1,$ Year $1.$ The bonds had a $7$ percent stated rate of interest and a fiveyear term. Interest is paid in cash annually, beginning December $31,$ Year $1.$ The bonds were issued at $98.$ 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 company's financial statements. Record the recognition of interest expense as transaction $2$a and amortization of the discount and the cash payment as transaction $2$ b $.$

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. DIAZ COMPANY

Effect of Transactions on Financial Statements