To determine the correct effect of the journal entry on the financial statements, we need to understand the components of the entry and their implications....
Cash Flow from Financing Activities
Financing activities involve transactions that raise or repay capital. These include issuing or retiring debt, issuing or repurchasing stock, and paying dividends. The cash payment in the journal entry, if related to debt repayment, would be classified as a cash flow from financing activities. However, the question doesn't provide enough information to determine whether the cash payment is related to debt repayment or another activity.
Stockholders' Equity
Stockholders' equity represents the ownership interest in a company. It's affected by various transactions, including issuing stock, paying dividends, and net income. The journal entry doesn't mention any transactions related to stock issuance, dividend payments, or net income. Therefore, it's unlikely that stockholders' equity is directly affected by this entry.
Bonds Payable Book Value
Bonds payable represent a debt obligation issued by a company. The book value of bonds payable is the carrying value on the balance sheet, which reflects the original issuance price adjusted for any amortization of discounts or premiums. The journal entry provides information about the credit to discount on bonds payable, indicating a reduction in the discount balance.
Discount on Bonds Payable
When bonds are issued at a discount, the discount represents the difference between the face value of the bonds and the proceeds received. This discount is amortized over the life of the bonds, reducing the discount balance and increasing the bonds payable book value. The credit to discount on bonds payable in the journal entry reflects the amortization of the discount, which directly increases the bonds payable book value.
Analyzing the Journal Entry
The journal entry indicates a credit to discount on bonds payable, which represents an increase in the carrying value of the bonds payable. Therefore, the statement that "the bonds payable book value increases by the amount of the credit to discount on bonds payable" is the correct answer.
Conclusion
The journal entry reflects an amortization of discount on bonds payable, leading to an increase in the bonds payable book value. The cash payment might be related to financing activities, but without further context, it's impossible to confirm its classification. Stockholders' equity is unlikely to be directly affected by this entry.