A is corrent. The requirement is to determine how the amortization of a bond premium on long-term debt should be presented in the statement of cash flows. If bonds are sold at a discount or premium, the interest expense for the period will differ from the change in cash resulting from payment of interest expense. When the premium is amortized, the interest expense included in income determination is not as large as the interest paid or becoming payable in the period. Because the cash outflow is larger than the deduction in arriving at net income, a deduction from net income is necessary to determine cash provided by operating activities (when using the indirect approach of presenting cash flows from operating activities).
B is incorrect. Amortization of a premium would be a deduction from net income.
C is incorrect. Amortization of a premium does not involve direct changes to cash.
D is incorrect. Amortization of a premium does not involve direct changes to cash.
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