Payne Co. prepares its Statement of Cash Flows using the indirect method. Payne's unamortized bond discount account decreased by $25,000 during the year.

How should Payne report the change in the unamortized bond discount in its Statement of Cash Flows?

	As a financing cash inflow
	As a financing cash outflow
	As an addition to net income in the operating activities section
	As a subtraction from net income in the operating activities section

This Answer is Correct (Answer is C, As an addition to net income in the operating activities section)

Explanation:

Bond discount represents interest in excess of the cash interest paid each period. Bond discount is the difference between the amount borrowed and face value and, thus, represents interest to be recognized over the bond term. This interest is recognized in interest expense as a reduction in the discount account.

The semiannual journal entry is: dr. Interest expense; cr. Discount; cr. Cash.

Interest expense recognized exceeds cash interest paid (an operating cash flow) by the cr. to Discount (this is the amortization amount).

Therefore, income is reduced by more than the amount of operating cash outflow. The amortization of discount is the difference between the reduction in earnings and reduction in operating cash flow.

Therefore, the amortization amount is added to income in the reconciliation of net income and net operating cash flow.

Questions:

Can please explain in a very easy way why Payne reports the change in the unamortized bond discount in its Statement of Cash Flows as an addition to net income in the operating activities section regardless of the explanation above since it's very hard for me to understand it? Also can explain in easy way why Interest Expense is debited and discount and cash is credited because I'm not understanding these journal entries?