Interest, issue, and redemption of a bond

On Jan 01, 01, entity E issues a bond. On the same day, E receives CU 100 for issuing the bond. No interest is explicitly stipulated. However, E has to pay CU 121 on Dec 31, 02 in order to settle its obligations under the bond. E measures the bond at amortized cost, i.e. according to the effective interest method. The effective interest rate is 10% p.a. (CU 121 : 112 = CU 100).

(Correct) posting status:

Jan 01, 01

Dr

Cash

100

Cr

Liability

100

Dec 31, 01

Dr

Interest expense

10

Cr

Liability

10

Dec 31, 02

Dr

Interest expense

11

Cr

Liability

11

Dec 31, 02

Dr

Liability

121

Cr

Cash

121

E”s profit for 01 is CU 200. In 02, E generates the same profit. For simplification purposes it is assumed that these amounts do not include any items that are of a non-cash nature. However, it has not been investigated, yet, whether the interest expense from the bond is of a non-cash nature.

Required

Illustrate the effects of the bond on E”s statement of cash flows for the years 01 and 02. E”s reporting periods end on Dec 31. E presents its cash flows from operating activities according to the indirect method and classifies interest paid as:

(a) cash flows from operating activities

(b) cash flows from financing activities

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