Marvin Company issues $125,000 of bonds at face value on January 1.The bonds carry a 6% annual stated rate of interest.Interest is payable in cash on December 31 of each year.Which of the following shows the effect of the first interest payment on the elements of the financial statements?

Question

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Interest payment = Face value of $125,000 × Stated rate of 6% rate = $7,500
The payment of interest when bonds are issued at face value decreases assets (cash) and decreases stockholders' equity (retained earnings). It increases expenses (interest expense), which decreases net income. It is reported as a cash outflow for operating activities.

Marvin Company Issues $125,000 of Bonds at Face Value on January