Answer (A) is correct. The debtor (issuer) on a bond sold at a premium debits or reduces the bond premium for the excess of cash interest paid over interest expense recognized under the effective interest method. The lender (buyer) likewise reduces the bond premium (by a credit) for the excess of cash interest received over interest income recognized. Interest paid (received) is a cash outflow (inflow) from an operating activity. In a reconciliation of net income to net cash flow from operating activities, both the issuer of the bond and the purchaser must make an adjustment for the difference between the cash flow and the effect on net income. Because the issuer’s cash outflow exceeded interest expense, it must deduct the difference (premium amortization) from net income in performing the reconciliation. The purchaser’s cash inflow is greater than interest income, so it must add the difference (premium amortization) to net income to arrive at net cash flow from operating activities.