Question

In a question, it is stated that no bonds were issued. Yet we have bonds payable provided in the comparative balance sheet as 100 at the beginning balance and 117 as the end balance. What will be the issuance of bonds payable in financing activities statement of cash flow? If it is 17 as I think, why will this be so, yet we are told no bond payable were issued?

Answer 1

When a bond is issued at a discount, the amount reported in balance sheet will be netted. For example: If a 2 year bond payable of face value $100 is issued at discount of $10, the amount to be reported in balance sheet will be $90.

Journal entry will be:

Cash Dr $90

Discount on bonds Dr $10

Bonds payable Cr $100

Every year the discount on bond will be amortized and the corresponding effect will result in increase in balance of bond payable in the balance sheet.

Journal entry for amortization ($10 / 2) will be:

Interest expense Dr $5

Discount on bonds Cr $5

Thus if the balance in bonds payable is increasing and it is mentioned that no bonds payable were issued, then it is because the bonds were issued at discount and the increase pertains to the amortization of the discount. This increase in the balance of bonds payable will have no effect on the financing activities in statement of cash flow.