Problem - On January 1, 2013, Datalink Inc. issued $100,000, 10%, 10-year bonds when the market rate of interest was 8%. Interest is payable on June 30 and December 31. The following financial information is available:
Sales $300,000
Cost of sales 180,000
Gross profit 120,000
Interest expense ?
Depreciation expense (14,500)
Other expenses (82,000)
Net income ?
Dec. 31, 2013 Jan. 1, 2013
Accounts receivable $55,000 $48,000
Inventory 87,000 93,000
Accounts payable 60,000 58,000
All purchases of inventory are on account. Other expenses are paid for in cash.
Instructions:
1) Prepare the journal entry to record the issuance of the bonds on January 1, 2013.
2) Compute (a) the amount of cash paid to bondholders for interest during 2013, (b) the amount of premium amortized during 2013, assuming Datalink uses the straight-line method for amortizing bond premiums and discounts, and (c) the amount of interest expense for 2013.
3) Prepare the Cash Flows from Operating Activities section of Datalink's statement of cash flows using (a) the direct method and (b) the indirect method.