[Anonymous]

See reference question below mine: I believe that the answer to this question is true in the case that it is referencing issuance of a bond. However, if it was from the standpoint of a company that purchased a bond, the income would be subtracted, not added back, correct? in issuance, discount amortization is an expense, while in holding a bond, discount amort is income.

how should you handle in instances where it doesn’t disclose whether the reference entity is issuing or purchasing a bond? would this ever happen in the actual exam? also, this amort would always be considered an add-back to operating activities, correct, since its related to current year earnings?

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Would the following be added back to net income when reporting operating activities’ cash flows by the indirect method?

Excess of treasury stock

acquisition cost over sales

proceeds (cost method)
Bond discount amortization
Yes
Yes
No
No
No
Yes
Yes
No
You Answered Correctly!
This answer is correct. Under the indirect method of reporting cash flows from operations, income from continuing operations is adjusted for changes in operating-related accounts and noncash expenses, revenues, losses, and gains. Noncash items that were subtracted in determining net income must be added back, including amortization of bond discount since it is a charge against income but does not increase cash. The excess of treasury stock acquisition cost would not be added back to net income when determining operating activities’ cash flows because it represents a financing activity.

[Anonymous]

It would not matter for a purchaser. Nothing needs to be done. All a purchaser gets semiannual/annually is the stated interest rate of the face value of the bond in cash.
The difference between the cash paid and the effective interest that should be paid gets added to the amortized cost of the bond(assuming the effective interest method)

The only reason it is even adjusted is due to interest expense flowing to the income statement. The interest expense is calculated using the market rate of interest* outstanding bond value= interest expense. It is different from the cash paid to bondholders.

[Anonymous]

I understand that no the actual cash flow, nothing would need to be done for a bond holder. however, is my assumption correct that a holder of the bond would recognize amortization of a discount as income, and an issuer recognizes it as an expense?

[Author]

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