Question

Do we use "Gain on retirement of bonds" when calculating the statement of cash flows using the direct method? and if so do we add or subtract the gain?

Answer 1

"Gain on retirement of bonds" has to be used while calculating the statement of cash flow.

Scenario 1 - Purchase of Bonds.

Gain on Retirement of Bonds will be added. The treatment in this scenario is as under

• If the bonds are used for Investment purpose then the inflow from "retirement of bonds" and "gain on retirement of bonds" will be shown under Investment activity.
• If the Bonds are held for dealing or trading purpose, then the cash flow from "retirement of bonds and gain on retirement of bonds will be shown under Operating activity

for e.g Investment is made at 10,000 and sold at 11,000 then 1,000 Gain is added in cash flow under Investment activity or Operating activity as per the business activity.

Scenario 2 - Bonds are issued as part of financing activity and retirement of bonds is done

There is no impact of Gain on retirement of Bonds in Direct Method of Cash flow

For e.g

Assume Bonds have face value of 10,000 and issued at discount of 300 and has book value of 9,700 (10,000 - 300) and is retired at 9,000. Since the cash paid is 9,000 is less by Rs. 700 (9700-9000), 800 is the gain on retirement of Bonds. The cash paid of 9,000 is a cash payment for a financing activity. The gain increased net income but there was no cash inflow. Hence there is no impact of Gain on retirement of Bonds in Direct Method of Cash flow.