Interest, issue, and redemption of a bond
On Jan 01, 01, entity E issues a bond. On the same day, E receives CU 100 for issuing the bond. No interest is explicitly stipulated. However, E has to pay CU 121 on Dec 31, 02 in order to settle its obligations under the bond. E measures the bond at amortized cost, i.e. according to the effective interest method. The effective interest rate is 10% p.a. (CU 121 : 112 = CU 100).
(Correct) posting status:
|
Jan 01, 01 |
Dr |
Cash |
100 |
|
|
Cr |
Liability |
100 |
||
|
Dec 31, 01 |
Dr |
Interest expense |
10 |
|
|
Cr |
Liability |
10 |
||
|
Dec 31, 02 |
Dr |
Interest expense |
11 |
|
|
Cr |
Liability |
11 |
||
|
Dec 31, 02 |
Dr |
Liability |
121 |
|
|
Cr |
Cash |
121 |
E”s profit for 01 is CU 200. In 02, E generates the same profit. For simplification purposes it is assumed that these amounts do not include any items that are of a non-cash nature. However, it has not been investigated, yet, whether the interest expense from the bond is of a non-cash nature.
Required
Illustrate the effects of the bond on E”s statement of cash flows for the years 01 and 02. E”s reporting periods end on Dec 31. E presents its cash flows from operating activities according to the indirect method and classifies interest paid as:
(a) cash flows from operating activities
(b) cash flows from financing activities