Question

Please, could you help me?

Digital Telephony issued 10% bonds, dated January 1, with a face amount of $46 million on January 1, 2018, The bonds mature in 2028 (10 years). For bonds of similar risk and maturity the market yield is 12%. Interest is paid semiannually on June 30 and December 31. Digital recorded the issue as follows: (EV of $1. PV of $1 FVA of $1. PVA of $1. EVAD of $1 and PVAD of $1) (Use appropriate factor(s from the tables provided.): General Journal Credit Debit Cash Discount on bonds 40,723,616 5,276, 384 Bonds payable 46,000,000 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 $587,322, 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 12% 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? Activity Cash Flow Cash outflow No cash flowS Cash outflow Amount Operating activities Investing activities Financing activities Required 3 > K Required 1

Answer 1

Solution: First we need to compute total interest and principle in two quarterly payments:

Payment date Sept.30,2018 Dec.31,2018 Quart. Payments Interest Principal Balance of Loan O $587,322 $8,412,678.00 $587,322 $252,380 $334,942 $8,077,736.34 $587,322

note: interest payment is second quarterly installment = ($9,000,000 - $587,322) × 12%×1/4

= $252,380

Total cash payment towards principal = $587,322 + 334,942 = $922,264

Thus, answer would be as follows:

Activity	Cash flow	Amount
Operating activity	Cash outflow	$252,380
Investing activities	No cash flow	$ 0
Financing activities	Cash outflow	$922,264