On January 1, 2015. Datalink Inc. issued $100.000,10%, 10-year bonds when the ma

ID: 2490179 • Letter: O

Question

On January 1, 2015. Datalink 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 following 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 bondholders for interest during 2015, (b) the amount of premium amortized during 2015, assuming Datalink uses the straight-line method for amortizing bond premiums and discounts, and (c) the amount of interest expense for 2015. Prepare the Cash Flows from Operating Activities section of Datalink's statement of cash flows using (a) the direct method and (b) the indirect method.

Explanation / Answer

Price of bond = Present value of annuity of interest payment + Present value of Principal

Present value of annuity = Annuity*{1-(1+r)-n}/n

Present value = (1+r)n

Annual Interest payment = $100,000*10% = $10,000

n = 10 years = 10

r = 8% = 0.08

Present value of annuity of interest payment = $10,000*(1-1.08-10)/0.08 = $10,000 * 6.7101 = $67,101

Present value of principal = $100,000/1.0810 = $46,320

Price of bond = $67,101 + $46,320 = $113,421

Date

Account titles and explanation

Debit

Credit

January 1, 2015

Cash

$ 113,421

Bonds payable

$ 100,000

Premium on issue of bonds

$ 13,421

(a) Cash paid to bondholders for interest during 2015 = $100,000 * 10% = $10,000

(b) Amount of premium amortized during 2015 = $13,421/10 = $1,342.10

Statement of Cash Flows (Using direct method)

Cash flow from operating activities

Cash received for sales

Sales + Increase in accounts receivables

$ 293,000.00

Cash paid for purchases

Cost of sales - Increase in accounts payable + Decrease in inventories

-$ 172,000.00

Cash paid for other expenses

-$ 82,000.00

Cash paid for interest on bonds

-$ 10,000.00

Net Cash flow from operating activities

$ 29,000.00

Statement of Cash Flows (Using Indirect method)

Cash flow from operating activities

Net Income

$ 14,842.10

Add: Depreciation Expense

$ 14,500.00

$ 29,342.10

Increase in Accounts receivable

-$ 7,000.00

Decrease in Inventory

$ 6,000.00

Increase in Accounts payable

$ 2,000.00

Decrease in Premium on issue of bond

-$ 1,342.10