Question

Most Solutions, Inc., issued 14% bonds, dated January 1, with a face amount of $680 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 expense is recorded at the effective interest rate. Interest is paid semiannually on June 30 and December 31. Most recorded the sale as follows:

January 1, 2018
Cash (price)	602,001,280
Discount on bonds (difference)	77,998,720
Bonds payable (face amount)		680,000,000

Required:
What would be the amount(s) related to the bonds that Most Solutions would report in its statement of cash flows for the year ended December 31, 2018? (List any cash outflow with a minus sign. Enter your answers in whole dollars.)

Answer 1

A 1 Most Solutions will report in the operating activities a positive adjustment to net income of $1,165,013 (see workig note) 2 2 Most Solutions will report a cash inflow from financing activities of $602,001,280 4 5 (amount equal to the issue price of the bonds). 6 Working note: 7 8 Carrying value of bonds on January 1 602001280 9 Interest expense to be recorded on June 30 48160102 10 Cash interest paid on June 30 11 Discount amortize in June 30 12 Carrying value of bonds on July 1 13 Interest expense to be recorded on December 31 47600000 0102 602561382 48204911 14 Cash interest paid on December 31 47600000 15 Discount amortize in December 31 604911 16 17 Positive adjustment to net income in the operating activities section 1165013

Above figures have been calculated in the following manner:

A B Most Solutions will report in the operating activities a positive adjustment to net 1 income of $1,165,013 (see workig note) 2 Most Solutions will report a cash inflow from financing activities of $602,001,280 4 5 (amount equal to the issue price of the bonds). 7 Working note: 8 Carrying value of bonds on January 1 602001280 9 Interest expense to be recorded on June 30 -B8*0.08 10 Cash interest paid on June 30 -680000000*0.07 B9- B10 11 Discount amortize in June 30 12 Carrying value of bonds on July 1 B8 + B11 13 Interest expense to be recorded on December 31 -B12*0.08 14 Cash interest paid on December 31 -680000000*0.07 15 Discount amortize in December 31 B13- B14 16 17 Positive adjustment to net income in the operating activities section B11+B15