Question

A company had an increase in interest payable during the year and also amortized discount on bonds payable. Under the direct method, the amount of interest paid during the year to be reflected in the statement of cash flows is

a) interest expense plus the increase in interest payable minus the discount amortization

b) interest expense plus the increase in interest payable plus the discount amortization

c) interest expense minus the increase in interest payable plus the discount amortization

d) interest expense minus the increase in interest payable minus the discount amortization

Answer 1

A company had an increase in interest payable during the year and also amortized discount on bonds payable. Under the direct method, the amount of interest paid during the year to be reflected in the statement of cash flows is

The correct answer is OPTION D i.e interest expense minus the increase in interest payable minus the discount amortization

Explanation

Direct method is used to show all the income and expenses in a detailed way as compared to indirect method.

It shows how the expenses paid affects the income statement and incomes changes the net profits.

Whenever the interest payable during the year increases and amortization of discount on bonds is done, it should always be subtracted from the interest expenses.

In the given case :
A company had an increase in interest payable during the year and also amortized discount on bonds payable.

Now under the direct method, the amount of interest paid during the year to be reflected in the statement of cash flows is :

interest expense minus the increase in interest payable minus the discount amortization.

SO, THE CORRECT ANSWER IS OPTION D.