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7 May, 04:06

Kier Company issued $660,000 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?

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  1. 7 May, 06:27
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    Interest Expense $39,600

    Cash Flow from Operating Activities $39,600

    Explanation:

    Payment of Interest Expense is the cash expense paid during the year which is deducted from the operating profit in the calculation of net income which is used to determine the cash flow from operating activities.

    Interest on the Bond = $660,000 x 6% = $39,600

    At the time of payment Journal Entry will be as follow

    Dr. Interest Expense $39,600

    Cr. Cash $39,600

    As the cash is paid against the operating activities.
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