Question

Payne Co. prepares its statement of cash flows using the indirect method. Payne's unamortized bond discount account decreased by $25,000 during the year. How should Payne report the change in unamortized bond discount in its statement of cash flows? a. As a financing cash inflow b. As a financing cash outflow c. As an addition to net income in the operating activities section d. As a subtraction from net income in the operating activities section.

Answer 1

Answer:

The correct answer is letter "C": As an addition to net income in the operating activities section.

Explanation:

Unamortized bond discounts are income-related items calculated by subtracting the value of the bond at maturity and the profit earned out of the sale of the bond. As the transaction has the purpose of obtaining net income, a company using the indirect method would add the result in the net income statement. The transaction has nothing to do with the financing activities of the firm but with operations.