Digital Telephony issued 10% bonds, dated January 1, with a face amount of $32 million on January 1, 2011. The bonds mature in 2021 (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:
Digital also leased switching equipment to Midsouth Communications, Inc., on September 30, 2011. Digital purchased the equipment from MDS Corp. at a cost of $6 million. The five-year lease agreement calls for Midsouth to make quarterly lease payments of $391,548, payable each September 30, December 31, March 31, and June 30, with the first payment on September 30, 2011. Digital's implicit interest rate is 12%.
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, 2011, if Digital uses the direct method? The indirect 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, 2011?
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, 2011?
4. Assume MDS manufactured the equipment at a cost of $5 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, 2011?