Digital Telephony issued 12% bonds, dated January 1, with a face amount of $35 m

Question

Digital Telephony issued 12% bonds, dated January 1, with a face amount of $35 million on January 1, 2018, The bonds mature in 2028 (10 years). For bonds of similar risk and maturity the market yield is 16%. Interest is paid semiannually on June 30 and December 31. Digital recorded the issue as follows: (FV of $1. PV of $1. FVA of $1. PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) General Journal Debit Credit Cash Discount on bonds 28,127,365 6,872,635 Bonds payable 35,000,000 Digital also leased switching equipment to Midsouth Communications, Inc., on September 30, 2018. Digital purchased the equipment from MDS Corp. at a cost of $9 million. The five-year lease agreement calls for Midsouth to make quarterly lease payments of $636,765, payable each September 30, December 31, March 31, and June 30, with the first payment on September 30, 2018, Digital's implicit interest rate is 16%. Required: 1. What would be the amount(s) related to the bonds that Digital would report in its statement of cash flows for the year ended December 31, 2018, under the direct method? 2. What would be the amounts related to the lease that Midsouth would report in its statement of cash flows for the year ended December 31, 2018, under the direct method? 3. What would be the amounts related to the lease that Digital would report in its statement of cash flows for the year ended December 31, 2018, under the direct method? 4. Assume MDS manufactured the equipment at a cost of $8 million and that Midsouth leased the equipment directly from MDS. What would be the amounts related to the lease that MDS would report in its statement of cash flows for the year ended December 31, 2018? Complete this question by entering your answers in the tabs below Required 1 Required 2 Required 3 Required 4 What would be the amounts related to the lease that Midsouth would report in its statement of cash flows for the year ended December 31, 2018, under the direct method? (Do not round intermediate calculations. Enter your answers in whole dollars. List cash outflows as negative amounts.) Activity Cash Flow Cash outflow o cash flow Cash outflow Amount Operating activities Investing activities Financing activities

Explanation / Answer

Ans 1 Activity Cash flow Amt Operating activities cash outflow ($4,200,000) (35000000*12%) Investing activity No cash flow $0 Financing activities Cash inflow $28,127,365 Ans 2 In books of Midsouth First payment on september 30 and than Dec 31 Activity Cash flow Amt Operating activities No cash flow $0 Investing activity No cash flow $0 Financing activities Cash outflow -1273530 (636765*2) ans 3 in books of Digital Activity Cash flow Amt Operating activities Cash inflow $1,273,530 Investing activity Cash outflow ($9,000,000) Financing activities No cash flow 0 ans 4 MDS report Activity Cash flow Amt Operating activities Cash inflow ($1,273,530) Investing activity No cash flow $0 Financing activities No cash flow 0

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