Question 5 (of 5) value: 0.75 points Most Solutions, Inc., issued 11% bonds, dat

Question

Question 5 (of 5) value: 0.75 points Most Solutions, Inc., issued 11% bonds, dated January 1, with a face amount of $650 million on January 1, 2016. The bonds mature in 2026 (10 years). For bonds of similar risk and maturity the market yield is 13%. Interest expense is recorded December 31. Most recorded the sale as follows at the effective interest rate. Interest is paid semiannually on June 30 and January 1, 2016 Cash (price) 575,442,400 74,557,600 650,000,000 What would be the amount(s) related to the bonds that Most would report in its statement of cash flows for the year ended December 31, 2016? (List any cash outflow with a minus sign. Enter your answers in whole dollars.)

Explanation / Answer

Most Solutions Inc

Determination of the amount(s) related to the bonds that Most would report in its statement of cash flows for the year ended December 31, 2016:

statement of cash flows -

operating

($71,500,000)

Investing

-

Financing

$578,857,406

Workings and computations:

End of period

cash interest payment

interest expense

discount amortization

carrying value

1-Jan-16

$575,442,400

30-Jun-16

$35,750,000

$37,403,756

$1,653,756

$577,096,156

31-Dec-16

$35,750,000

$37,511,250

$1,761,250

$578,857,406

Total

$71,500,000

$74,915,006

Cash received on Bond issue = $575,442,400

June 30, 2016-

Interest payment,

= 11% x $650,000,000 x 6/12 = $35,750,000

Interest expense = $575,442,400 x 6.5% = $37,403,756

Discount amortization = 37,403,756 – 35,750,000 = $1,653,756

Carrying value = 575,442,400 + 1,653,756 =$577,096,156

Note: market yield rate for semiannual interest payment = 13% x 6/12 = 6.5%

December 31, 2016

Interest payment,

= 11% x $6,500,000 x 6/12 = $35,750,000

Interest expense = $577,096,156 x6.5% = $37,511,250

Discount amortization = 37,511,250 – 35,750,000 = $1,761,250

Carrying value = $577,096,156 + 1,761,250 = $578,857,406

Total cash payment made in 2016 towards interest = $71,500,000

This amount is reported under operating activity section of the cash flow statement.

Carrying value of bond as at December 31, 2016 = $578,857,406

This amount is reported under financing section of the cash flow statement.

statement of cash flows -

operating

($71,500,000)

Investing

-

Financing

$578,857,406

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