Final answer:
The decrease in Barber Corp.'s bonds payable should be shown as a cash outflow in the financing section of the statement of cash flows. Bond values decrease when market interest rates rise above the bond's interest rate due to the bond being less attractive than newer bonds with higher rates. Companies issuing bonds are obligated to make interest payments or face potential legal action.
Step-by-step explanation:
The decrease in Barber Corp.'s balance in bonds payable likely indicates that the company has paid down some of its debt or possibly repurchased its bonds. This is relevant to the statement of cash flows, as paying off debt is considered a financing activity. The decrease itself would generally be shown as a cash outflow on the statement of cash flows, reflecting the cash used to reduce the company’s outstanding bonds payable.
Concerning interest rates and the price of bonds, when the market interest rate rises, the value or price of existing bonds, which have lower interest rates, tends to decrease. This is because new bonds would be issued with higher interest rates, making the existing bonds less attractive unless they are sold at a lower price that compensates for the lower interest payments. Similarly, if the interest rate falls, existing bonds with higher rates become more valuable and their price tends to increase.
The situation where a company, like the example given with Ford, issues bonds, obligates the company to make the agreed interest payments to the bondholders. If the company fails to make these payments, the bondholders have a right to take legal action to reclaim their funds, although recovery is not guaranteed if the company lacks sufficient assets.