[Anonymous]

The amortization of bond premium on long term debt should be presented in a statement of cash flows (using indirect approach for operating activities) as a(n)

a: deduction from net income

b: investing activity

c: financing activity

d: addition to net income

the correct answer is deduction from net income, but i dont get why?

[passcpa123]

that is because bond premium amortization decreases interest expense to be paid, and thus increases net income. However, Interest expense is a non-cash expense, so it should be deducted from net income.

[rjcpa]

Because, when you amortize it during the month, you credit income. Therefore, you must take it out of income since it is not an actual cash item. Same thing you do with depreciation exp., you add it to income since it is a non cash expense.

FAR - 10/3/12 - 86
BEC - 11/27/12 - 70 1/14/13 - 81
AUD - 4/4/13 - 87
REG - 7/8/13 - 80

[mangos]

Think of it as a gain — because that's what a premium is. Gains are deducted from net income.

If it had said amortization on a discount (which increases interest expense), then it would've been an addition to net income, much like depreciation expense because it's non-cash.

FAR (5/07/13): 96

[Anonymous]

thanks, i test on wednesday of next week and i am having problems with EPS and cashflow statements

[Anonymous]

wow mangos, i have never actually heard or thought of thinking of discount and premiums as a loss/gain, that might be the best analogy i have ever heard, you just completely saved me loads of time on the test if a discount/premium question is asked… i am truly astonished that i never thought of it that way before

[Anonymous]

since i am testing at the end of the window, any idea on how long it will take before my score comes in?

[mangos]

June 10, I think.

FAR (5/07/13): 96

[Anonymous]

another one for you guys to try to dumb down for me if you can…

On October 1, 2010 Fleur Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note's market rate of interest was 11% Fleur recorded the purchase at the note's face amount. All of the merchandise was sold by December 1, 2010. Fleur's 2010 Financial statements reported interest payable and interest expense on the note for 3 months at 16%. All amounts due on the note were paid February 1, 2011. Fleur's 2010 cost of goods sold for the holiday merchandise was

a: overstated by the difference between the note's face amount and the note's october 1, 2010 present value plus 11% interest for 2 months

b: understated by the difference between the note's face amount and the not's october 1, 2010 present value

c: overstated by the difference between the note's face amount and the note's october 1, 2010 present value

d: understated by the difference between the note's face amount and the note's october 1, 2010 present value plus 16% interest for 2 months.

correct answer is B, but the explanation in wiley is just a little to wordy and i cant follow it, can someone bread this down for me

[Author]

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