Lease Question Help, Please

At the beginning of the year, a lessee company entered into a new capital lease agreement. The lease payments are $100,000 annually and are due at the end of each year for five years. The appropriate discount rate is 12%. Depreciation is on a straight line basis with zero salvage value. With respect to the effect of the lease on the company’s financial statements in the first year of the lease, which of the following is MOST accurate? The reduction in the company’s: A. pretax income is $72,096. B. cash flow from financing is $56,742 C. cash flow from operations is $72,096 D. cash flow from operations is $115,353 The feedback/answer sheet is unclear… at least for those who are trying to comprehend their garbage :wink: but what is the correct answer? any help would be greatly appreciated.

PMT=100000, N=5, I=12, FV=0 PV=360,477.62 Int. exp = 360,477.62*0.12 = 43,257.24 Depr exp = 360477/5 = 72,095.4 The reduction in the company’s: A. pretax income is $72,096.

thats killin it sharp, you are good to go Saturday man, crisper than lettuce…holy hell i must be losing it with a comment like that

thanks man, but i still need to cram the material pretty badly

Shouldn’t it be B? Pretax income is reduced by the sum of the interest and the dep…so by 72096+43257. The principal repayment part is 100,000-43257=56743 This is how much the CFI should be reduced by. What say?

how about pretax income being reduced by Interest of 43,257 and Depreciation of 72,095 = 115,352. I’ll go with B, as CFF = Lease payment of 100,000 - interest (which is CFO) of 43,257 = 56,742.

supersharp: i think its B bcoz as depreciation is 72095 and int exp is 43257 the reduction in pretax income must be more than 72095, but the financing part is 100000-43257 = 56743 and that is a payment for financing part and also a reduction in cfo, rest of the figures are not correct in their places.

Pretax income is affected by both depreciation (taken out in SG&A) and interest expense, taken out from EBIT to arive to EBT. It should be B. The difference between the amount paid to the lessor and the interestr expense is the re-payment of principal, and it is a financing cash outflow.

principal hits CFF or CFI? i am losing it finally also, cant it be D, because if you hit income by 115, then doesnt lower net = lower CFO ???

Operating cash flow is not affected, depreciation is a non-cash charge.

interest is…

Principal repayments hit CFI- its an investment in an asset, so to speak.

daj224 Wrote: ------------------------------------------------------- > principal hits CFF or CFI? i am losing it finally > > > > also, cant it be D, because if you hit income by > 115, then doesnt lower net = lower CFO ??? ok, i got it. 3 steps, find int, find depn expense, and back into principal. they trick you b/c 115 is a number we get, but instead they tack it onto CFO, bastards. princpial = lease PMT - interest thanks guys

PMT=100,000, N=5, I=12, FV=0 PV=360,477.62 Int. exp = 360,477.62*0.12 = 43,257.24 income statement position Depr exp = 360477/5 = 72,095.4 non-cash charge Payment under lease 100,000, that is split between the interest and the repayment of principal. Principal repayment = financing cash outflow = 100,000 - 43,257.24 = $56,742

shreya4848 Wrote: ------------------------------------------------------- > Principal repayments hit CFI- its an investment in > an asset, so to speak. hits CFF not CFI

yup, CF associated with leases is Financing, not Investing, since lease is a type of Off BS financing.

dahhhh looks like it’s time to cram some more stalla leases

choose schweser in level two :slight_smile: (hopefully) is stalla any good? @ sharpshooter

stalla is supergood at FSA SS9

yeah it’s pretty good i’m using stalla because i didn’t like the schweser questions that much