On January 1.2015. data link lnc issued S100.000.10%. 10-yesr bonds when the mar
ID: 2727785 • Letter: O
Question
On January 1.2015. data link lnc issued S100.000.10%. 10-yesr bonds when the market rate of interest was 3%. Interest is payable on June 30 and December 31.The following financial is available All purchases of inventory are on account Other expenses are paid for in cash. instructions: Prepare the journal entry to record the issuance of the bonds on January 1.2015. Compute the amount of cash paid to for interest during 2015.the amount of premium amortized during 2015. assuming uses the straight-fine method for amortizing bond premiums and discounts, and of interest expense for 2015. Prepare the Cash Flows from Operating Activities section of statement of cash flows using r the direct method and the indirect method.Explanation / Answer
1) Journal entry for issuance of bonds on January 1, 2015.
Cash.........................................113,591
Premium on bonds payale............... 13,591
Bonds payable...............................100,000
Calculation for PV of the bond:
PV = 100000*pvif(4,20) + 5000*pvifa(4,20) = 100000*0.4564 + 5000*13.5903 = 45640 + 67951 = $113,591
2)
a) The interest paid by Datalink Inc during 2015 is:
June 30th.................5,000
December 31st.........5,000
Total 10,000
b) Amount of premium amortized during 2015:
Premium to be amortized every half year using straight line method = 13591/20 = $680
for 2015 = 680*2 = $1,360
c) Interest Expense for 2015:
Interest paid during the year - premium amortized = 10,000 - 1360 =$8,640
3)
39000
Workings for Net Income:
CASH FLOW FROM OPERATING ACTIVITIES: If interest paid is treated as Operating activity: a) Direct Method: Cash received from customers 293000 Cash paid for merchandise purchase -172000 Cash paid for other expenses -82000 Interest paid -10000 Net Cash from operating activities 29000 b) Indirect Method: 14860 Net Income Adjustments: Depreciation 14500 Decrease in premium on bonds -1360 Increase in accounts receivable -7000 Decrease in inventory 6000 Increase in accounts payable 2000 Net cash from operating activities 14140 29000 If interest paid is treated as financing activity: a) Direct Method: Cash received from customers 293000 Cash paid for merchandise purchase -172000 Cash paid for other expenses -82000 Net Cash from operating activities 39000 b) Indirect Method: Net Income Adjustments: 14860 Depreciation 14500 Interest expense 8640 Increase in accounts receivable -7000 Decrease in inventory 6000 Increase in accounts payable 2000 Net cash from operating activities 2414039000