Question

In March 2012, Yoshiro Inc.. decided to retire an outstanding bond issue before maturity. The coupon rate on the bond issue was 5%. The bond was issued in 2011 at an effective interest rate of 6%. On the day Yoshiro retired the bond issue, the market interest rate was 4%. Which of the following items would be decreased by the bond retirement transaction?
a. Cash from Operating Activities
b. Cash from Financing Activities
c. Cash from Investing Activities
d. Bonds Payable
e. Net Income

Answer 1

Answer:

• b. Cash from Financing Activities  
• d. Bonds Payable
• e. Net Income

Explanation:

Bonds are a form of long term debt and in the cashflow statement this goes to the Financing section. A retirement of bonds would reduce cash and this would come from the Financing activities.

Bonds Payable will also decrease because the bond that is being retired will reduce the number of bonds payable that the company has to pay off.

Finally the Net income will reduce as well to reflect the loss on bond retirement. The bonds were issued at a discount owing to interest rates being higher than the coupon rate in 2011 but on the day the bonds were retired they were selling at a premium with interest rates at 4%. The company paid more than they received and this loss will reduce the net income.