Determining Effects on the Statement of Cash Flows
A number of events over the life of a bond have effects that are reported on the statement of cash flows. For each of the following events, determine whether the event affects the statement of cash flows. If so, describe the impact and specify where on the statement the effect is reported.
Required:
1. A $1,000,000 bond is issued at a discount. The reported amount of the bond on the balance sheet is $960,000.
2. At year-end, $45,000 accrued interest is reported and $1,000 of the bond discount is amortized using the straight-line method.
3. Early in the second year, accrued interest is paid. At the same time, $9,000 interest that accrued in the second year is paid.
4. The company elects to retire the debt in the fifth year. At that time, the reported carrying value of the bonds is $960,000 and the company reports a $20,000 gain on the early retirement of debt.
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