Choice "A" is correct. When the indirect method is used, net income must be adjusted for all income statement items that do not affect operating cash receipts and disbursements. When a bond interest payment is made, the following journal entry is recorded:
| Debit (Dr) | Credit (Cr) |
|---|
| Interest expense | $ XX | |
| Cash | | $ XX |
| Bond discount amortization | | XX |
Interest expense exceeds the cash interest payment by the amount of the bond discount amortization. The bond discount amortization must therefore be added back to net income so that operating activities reflect only the cash paid for interest.
Choice "d" is incorrect. Although arising from debt, which is a financing activity, bond discount amortization is reported in operating activities because it is related to interest expense, which is an income statement (operating activities) item.
Choice "c" is incorrect. Bond discount amortization is not related to investments and is therefore not reported in investing activities.
Choice "b" is incorrect. Bond discount amortization is reported in operating activities when the indirect method is used for the reasons described above.
