The Gordon Corporation issued $70,000 of 6%, 5-year bonds on January 1, Year 1 at 98. The interest payments are due on December 31 each year. Gordon uses the straight-line method of amortization. On December 31, Year 5, Gordon Corporation records interest and amortization. Immediately after that, Gordon pays off the bonds as scheduled. Which of the following answers shows the effect of the bond payoff on the financial statements?

Question

Quizplus · Accepted Answer

Once the final amortization has been recorded, the carrying value of the bond liability is equal to the face value, $70,000. The payment to retire the bonds decreases assets (cash) and decreases liabilities (bonds payable). $68,600 of the payment is reported as a cash outflow for financing activities, and $1,400 is reported as a cash outflow for operating activities.

The Gordon Corporation Issued $70,000 of 6%, 5-Year Bonds on January