Madison Company issues $12,500 of bonds at face value on January 1. The bonds carry an 8% annual stated rate of interest. Interest is payable in cash on December 31 of each year. Which of the following reflects the financial statement effects of the first interest payment?

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$12,500 face value bonds x 8% stated rate = $1,000 interest payment; Payment of interest when bonds are issued at face value decreases assets (cash) and increases expenses (interest expense), which decreases net income and equity. It is reported as a cash outflow for operating activities.

Madison Company Issues $12,500 of Bonds at Face Value on January