In its 2009 income statement, WME reported $11,000 of interest expense on its outstanding bonds. During the year, WME paid its regular installments of $9,000 of interest in cash. In its reconciliation schedule, WME should:
A)Show a $2,000 positive adjustment to net income under the indirect method for the decrease in bond premium.
B)Show a $2,000 negative adjustment to net income under the indirect method for the decrease in bond premium.
C)Show a $2,000 positive adjustment to net income under the indirect method for the decrease in bond discount.
D)Show a $2,000 negative adjustment to net income under the indirect method for the decrease in bond discount.When interest expense exceeds the cash paid, the effective interest rate exceeds the stated interest rate; therefore, the bond was sold at a discount.

Question

Quizplus · Accepted Answer

If WME paid $9,000 of interest in cash and recorded interest expense of $11,000, the bond was sold at a discount. Therefore, WME should show a positive adjustment to net income of $2,000 for the decrease in bond discount under the indirect method in the reconciliation schedule. This adjustment is necessary to reconcile the difference between the cash paid and the interest expense recorded on the income statement.

In Its 2009 Income Statement, WME Reported $11,000 of Interest