Cash Flow Effects of a Bond Premium
On January 1, 2008, Data link Inc. issued $100,000,10%,10 year bonds when the market rate of interest was 8%. Interest is payable on June 30 and December 31. The following financial information is available:
Sales |
$300,000 |
Cost of sales |
180,000 |
Gross profit |
120,000 |
Interest expense |
? |
Depreciation expense |
(14,500) |
Other expenses |
(82,000) |
Net income |
? |
|
Dec 31, 2008 |
Jan 1, 2008 |
Accounts receivable |
$55,000 |
$48,000 |
Inventory |
87,000 |
93,000 |
Accounts payable |
60,000 |
58,000 |
All purchases of inventory are on account. Other expenses are paid for in cash.
Instructions:
1. Prepare the journal entry to record the issuance of the bonds on January 1, 2008.
2. Compute (a) the amount of cash paid to bondholders for interest during 2008, (b) the amount of premium amortized during 2008, assuming Datalink uses the straight line method for amortizing bond premiums and discounts, and (c) the amount of interest expense for 2008.
3. Prepare the Cash Flows from Operating Activities section of Datalink’s statement of cash flows using (a) the direct method and (b) the indirect method.