Question

Each year, White Mountain Enterprises (WME) prepares a reconciliation schedule that compares its income statement with its statement of cash flows on both the direct and indirect method bases.

In its 2018 income statement, WME reported $11,000 of interest expense on its outstanding bonds. During the year, WME paid its regular installments of $9,000 of interest in cash. In its reconciliation schedule, WME should:
A. Show a $2,000 positive adjustment to net income under the indirect method for the decrease in bond premium.
B. Show a $2,000 negative adjustment to net income under the indirect method for the decrease in bond premium.
C. Show a $2,000 positive adjustment to net income under the indirect method for the decrease in bond discount.
D. Show a $2,000 negative adjustment to net income under the indirect method for the decrease in bond discount.

Answer 1

C. Show a $2,000 positive adjustment to net income under the indirect method for the decrease in bond discount.

Step-by-step explanation:

According to the scenario, computation of the given data are as follows,

Reported interest expense = $11,000

Interest expense paid = $9,000

So, Adjustment in net income = $11,000 - $9,000

= $2,000 (positive)

Here, The bond is issued at decreased discount when the interest cost exceeds the cash paid for interest expense and the effective interest rate exceeds the stated interest rate.

Hence, option C is the correct answer.