In its 2011 income statement, WME reported $11,000 of interest expense on its ou
ID: 2472821 • Letter: I
Question
In its 2011 income statement, WME reported $11,000 of interest expense on its outstanding bonds.
During the year, WME paid its regular installments of $9,000 of interest in cash. In its reconciliation
schedule, WME should show a
A. $2,000 positive adjustment to net income under the indirect method for the decrease in bond discount.
B. $2,000 negative adjustment to net income under the indirect method for the decrease in bond discount.
C. $2,000 positive adjustment to net income under the indirect method for the decrease in bond premium.
D. $2,000 negative adjustment to net income under the indirect method for the decrease in bond premium.
Explanation / Answer
A. $2,000 positive adjustment to net income under the indirect method for the decrease in bond discount.
Interest Expense includes $2,000 which is discount amortization included as interests expense which is not a cash expense .
Since $2,000 decreased net income, to reconcile to a cash basis, it needs to be added on the operating section of the statement of cash flows.