n March 2012, Yoshiro Inc.. decided to retire an outstanding bond issue before m

Question

n March 2012, Yoshiro Inc.. decided to retire an outstanding bond issue before maturity. The coupon rate on the bond issue was 5%. The bond was issued in 2011 at an effective interest rate of 6%. On the day Yoshiro retired the bond issue, the market interest rate was 4%.

Which of the following items would be decreased by the bond retirement transaction? (check all that apply)

a - Cash from Operating Activities

b - Cash from Financing Activities

c - Cash from Investing Activities

d - Bonds Payable

e - Net Income

Explanation / Answer

First of all it is a Financing activity as bonds , common stock they fall under financing activity, as the company raises funds from them. a) Cash flow from Financing Activities- as the bonds ar eretired so it is paid so it will decrease.

d) Bonds Payable- Due to retirement of bonds the outshatnding bonds are decreased.

e) Net Income- As bonds were issued at discount as coupon rate was 5% and market rate was 6% so they were issued at discount.At teh time of retirement the market rate decreased and bonds are retired. The net affect of it will be loss on retirement of bonds So net Income will also decrease

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