# Capital Lease

The answer to this problem is on the CFA site, but could someone show me how to get the answer? 16. An analyst gathered the following information about the new capital lease obligation a company made at the beginning of the year: Annual end of year payments = \$16,000 Term of the lease = 10 years Appropriate discount rate = 10% Depreciation method = Straight-line Salvage assumption = Zero salvage value In the first year of the lease, the cash flow from financing section of the lessee company’s statement of cash flows will contain a lease-related cash outflow that is closest to: A. \$6,169. B. \$9,831. C. \$14,400. D. \$16,000.

is it A?

Insert data into your calculator to get the PV of the capital lease: N=10 I/Y=10% PMT=16,000 FV=0 CPT PV = 98,313.01 So, at the 10% interest rate, the interest expense would be 10%*98,313.01=9,831.3, but the lease payment is 16,000. The difference between the IE and the lease payment is the repayment of the principal of the capital lease, which is a financing outflow: 16,000-9,831.3=6,168.7~6,169, should be A.

Yeah, nice 1 map.

Correct. Thanks.

Following the subject of the post, it states that the Current ratio would decrease since it puts a liability on the balance sheet and the portion due next year as a current liability. However from what i understood is that when a capital lease is accounted for, the amount is recorded for both the Assets and Liabilities, so would this not result in equal increases and thus have no effect on the ratio?

look at this with an example. CA = 100, CL = 80 CA / CL = 100/80 = 1.25 both increase by 10 CA=110, CL=90 CA / CL = 110/90 = 1.22 so the ratio decreases if the original ratio was > 1. Now CA = 80, CL = 100 CA / CL = 0.8 CA = 90, CL = 110 CA / CL = 90/110 = 0.818 So Ratio increases if the original ratio was < 1.

Alright, makes sense…so the only exception is when CA=CL, which is rare, right?

CPK123 is right in explaining impact of equal change in CA and CL on CR. But to answer Reineir’s question of impact of Capital lease on CR…Recognition of capital lease in BS only increases long term asset,long term liability and CL(current yr portion).But there is no change in current asset. So CR decreases because of increase in CL.