Problem: Module $3$ Textbook Problem $5$

Learning Objective: $3-6$ Using the straight$-$line method show how bonds issued at a discount affect financial statements

Diaz Company issued $$115,000$ 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 $98.$ The straight$-$line method is

used for amortization.

Required

a$.$ 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

company's 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.

Req A

Req $B$ to $E$

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 company's 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.$)$

Complete this question by entering your answers in the tabs below.

Req $A$

Req $B$ to $E$

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.