A company prepared the following journal entry: Which of the following statements is correct?

A) The book value of the bonds was greater than the cash payment.
B) The increase in stockholders' equity equals the loss on the bond retirement.
C) The decrease in assets is greater than the decrease in liabilities and,as a result,stockholders' equity decreases.
D) The net cash flow from financing activities decreases by the book value of the bonds payable.

Question

A company prepared the following journal entry:

Which of the following statements is correct?

A) The book value of the bonds was greater than the cash payment.
B) The increase in stockholders' equity equals the loss on the bond retirement.
C) The decrease in assets is greater than the decrease in liabilities and,as a result,stockholders' equity decreases.
D) The net cash flow from financing activities decreases by the book value of the bonds payable.

Blaze Berkely · Accepted Answer

Final Answer : C, Explanation :  The journal entry indicates that bonds were retired, which means that a liability (bonds payable) was decreased. However, the entry also shows that cash was paid out, which means that an asset (cash) was decreased as well. Since the decrease in assets is greater than the decrease in liabilities, this results in a decrease in stockholders' equity (specifically, retained earnings). Therefore, statement C is correct. Statement A is incorrect because we do not know the book value of the bonds or the cash payment amount from the given journal entry. Statement B is incorrect because we do not know the amount of the loss on the bond retirement from the given entry. Finally, statement D is incorrect because the journal entry does not give information about the net cash flow from financing activities.

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