AuthorTopic: Question 16 from Sample paper
maxhui
@2007-05-06 09:57:32
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.

The answer provided is a but isn't it answer a should be the cash flow from operating and answer b is the cash from financing
innosaur
@2007-05-06 20:59:10
agree with you. first year 9,831 is interest payment and 6,169 is payment of principal (operating).
maxhui
@2007-05-07 08:58:17
Re:innosaur

Why do u think the interest payment is 9831, isn't it the interest payment should be 6169 that is [(160000 / (1.1)^10] * 10%, so the priciple payment should be 16000 minus 6169 that is 9831.
PhiWong
@2007-05-08 03:49:17
Should the interest expense of 9,831 be in the CFO and the rest of the principal be in the CFF.
labsbamb
@2007-05-08 05:58:58
phiwong
according to us GAAP
dividend paid :CFF
interest paid:CFO
innosaur
@2007-05-10 20:40:50
maxhui,
NPV of this lease should be [16,000/(1+0.1)]+[16,000/(1+0.1)^2]+...+[16,000/(1+0.1)^10]=98,313 therefore the first year interest should be 10% of that which is 9,831. Therefore, out of the 16,000 annual payment, 9,831 is interest payment and the rest 6,169 is principal payment.
labsbamb cleared our confusion on how to treat interest and divident receipt and payment in CF. In this case, 9,831 should be CFO and the principal payment of 6,169 should be CFF as it it to reduce the finance of the lease asset.
maxhui
@2007-05-26 09:19:01
Innosaur,

Thanks for the working.I appreciated it

Max