Question

Kier Company issued $600,000 in bonds on January 1, Year 1. The bonds were issued at face value and carried a 5-year term to maturity. The bonds have a 6.00% stated rate of interest and interest is payable in cash on December 31 each year. Based on this information alone, what are the amounts of interest expense and cash flows from operating activities, respectively, that will be reported in the financial statements for the year ending December 31, Year 1

Answer 1

If Kier Company issued $600,000 in bonds on January 1, Year 1, at face value with a 5-year term to maturity and a 6.00% stated rate of interest, the interest expense would be $36,000 and the cash flows from operating activities would include adding back the interest expense as a non-cash expense.

Step-by-step explanation:

If Kier Company issued $600,000 in bonds on January 1, Year 1, at face value with a 5-year term to maturity and a 6.00% stated rate of interest, the amounts of interest expense and cash flows from operating activities for the year ending December 31, Year 1 can be calculated as follows:

• Interest expense: $600,000 x 6.00% = $36,000
• Cash flows from operating activities: The interest expense of $36,000 will be reported in the income statement as an expense, and it will also be added back to net income in the operating activities section of the statement of cash flows because it is a non-cash expense.

Answer 2

interest expense = $36,000

cash flows from operating activities = - $36,000

Step-by-step explanation:

issued $600,000 in 6% bonds, with a 5 year maturity with an annual coupon paid December 31.

since bonds were issued at face value, interest expense = face value x bonds payable = 6% x $600,000 = $36,000

cash flows from operating activities related to this operation = -$36,000

interest expense is part of operating activities, so they decrease the cash flow from operating activities.