Question

Agee Technology, Inc., issued 9% bonds, dated January 1, with a face amount of $400 million on July 1, 2018, at a price of $380 million. For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. Prepare the journal entry to record interest at the effective interest rate at December 31. What would be the amount(s) related to the bonds that Agee would report in its statement of cash flows for the year ended December 31, 2018, if it uses the direct method?

Answer 1

Answer:

a) Prepare the journal entry to record interest at the effective interest rate at December 31.

- Interest expense (10% × 1/2 × $380) = $19.0

-Cash (paid to bondholders) (9% × 1/2 × $400) = $18.0

- Discount on Bond Payable 19.0  - 18.0 = 1

Account Title                                 Dr            Cr

Interest expense                            19

Discount on Bond Payable                             1

Cash                                                                18

What would be the amount(s) related to the bonds that Agee would report in its statement of cash flows for the year ended December 31, 2018, if it uses the direct method?

-Agee would report the cash inflow of $380 million from the sale of the bonds as a cash inflow from Financing Activities in its statement of cash flows. (selling bonds is a financing activity)

-The $18.0 million cash interest paid is cash outflow from Operating Activities because Interest is an Income Statement (Operating) item.