[The following information applies to the questions displayed below.]

On January 1 Year 1, Gordon Corporation issued bonds with a face value of $70,000, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds were issued at 98. Interest is payable in cash on December 31 each year. Gordon uses the straight-line method to amortize bond discounts and premiums.

-On December 31,Year 5,Gordon Corporation makes the final entry to record interest and amortization.Immediately after that,Gordon pays off the bonds as scheduled.Which of the following shows the effect of the bond payoff on the elements of the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question

[The following information applies to the questions displayed below.]

On January 1 Year 1, Gordon Corporation issued bonds with a face value of $70,000, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds were issued at 98. Interest is payable in cash on December 31 each year. Gordon uses the straight-line method to amortize bond discounts and premiums.

-On December 31,Year 5,Gordon Corporation makes the final entry to record interest and amortization.Immediately after that,Gordon pays off the bonds as scheduled.Which of the following shows the effect of the bond payoff on the elements of the financial statements?

A)Option A 
B)Option B 
C)Option C 
D)Option D

Quizplus · Accepted Answer

Once the final amortization has been recorded,the carrying value of the bond liability is equal to the face value of $70,000.The payment to retire the bonds decreases assets (cash)and decreases liabilities (bonds payable)by $70,000.For reporting purposes,the cash outflow is separated into two parts on the statement of cash flows: $68,600 of the cash outflow is reported in the financing activities section because it represents repaying the principal amount borrowed;the remaining $1,400 cash outflow is reported in the operating activities section because it represents the interest arising from issuing the bonds at a discount.

[The Following Information Applies to the Questions Displayed Below