Dn January 1.2015. Data link Inc. issued $100.000,10%. 10-year bonds when the ma

Question

Dn January 1.2015. Data link Inc. issued $100.000,10%. 10-year bonds when the market rate of interest was 3%. Interest is payable on June 30 and December 31.The financial information is available. All purchases of inventory are on account Other expenses are paid for in cash. Prepare the journal entry to record the issuance of the bonds on January 1.2015. Compute (a) the amount of cash paid to for interest during 2015. (b) the amount of premium amortized during 2015. assuming Dataink uses the straight-fine method for amortizing bond premiums and discounts, and (c) the of interest expense for 2015. Prepare the Cash Flows from Operating Activities section of Datalnk's statement of cash flows using (a) the direct method and (b) the indirect method.

Explanation / Answer

1. Present Value of bonds = Present value of interest payments + Present value of maturity amount

= (100000 x 5% x Cumulative PVF @ 4% for 20 semiannual periods) + (100000 x 0.456)

= (5000 x 13.590) + (100000 x 0.456)

= $113550

Journal Entry for issuance of bonds:

Jan 1 Cash 113550

Bonds Payable 100000

Premium on bonds payable 13550

2. a. Amount of cash paid to bondholders = Interest on 30th June + Interest on 31st Dec

= 5000 + 5000

= $10000

b. Amount of premium amortized during 2015 = 13550/20 x 2 = $1355

c. Interest expense for 2015 = 10000 + 1355 = $11355

3. Cash flows from operating activities:

a. Direct Method:

Purchases = Closing inventory + Cost of sales - Opening inventory

= 87000 + 180000 - 93000

= $174000

b. Indirect Method:

Income statement:

Cash flow from operations:

$ Cash collected from customers (Opening + Sales - Closing) 293000 Cash paid to suppliers (Opening + Purchases - Closing) -172000 Cash paid for expenses -82000 Cash generated from operations 39000 Interest paid (10000) Net cash from operating activities 29000

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