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.

A

can you please give the explanations?

Sure. First you calculate the PV of Lease Payments: N=10 I/Y = 10 PMT=16000 PV=? -> 98313.07 First year interest expense would be: 98313.07*10%=9831.307 Your annual lease payments are 16000. So principal payment = 16000-9831.307 = 6169. Remember only Principal payment is included in CFF. Int Exp fall within CFO. Hope this helps.

has been solved before. 98313 = PV (MLP) Year 1:Interest Expense = 9831 Total Lease Payment: 16000 So CFF = 16000 - 9831 (RePayment of Principal) = 6169 CP

There are two possible correct answers. US GAAP requires that interest be classified as cashflow operations (CFO) This way the interest of $9831 will be subtracted and $6169 is CFF outflow at end of year. ANS = A However IAS GAAP allows interest to be classified either as CFO or CFF. It gives one the choice of where they want to record Interest. That way the whole year-end payment can be CFF. ANS = A or D

Thanks a lot for your explanations. Really helped a lot