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**CFA Practice Question**

On January 1, a company entered into a capital lease resulting in an obligation of $10,000 being recorded on the balance sheet. The lessor's implicit interest rate was 12 percent. At the end of the first year of the lease, the cash flow from financing activities section of the lessee's statement of cash flows showed a use of cash of $1,300 applicable to the lease. The amount the company paid the lessor in the first year of the lease was closest to:

A. 2,500.

B. 1,300.

C. 10,000.

**Explanation:**Financing section shows principal reduction only. Rental payment consists of interest plus principal repayment.

= $10,000 x 0.12 + $1300 = $1200 + $1300 = $2500

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**User Contributed Comments**
2

User |
Comment |
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Mariana80 |
Can someone explain? So is $1300 assumed to be the principal and $1200 the interest? |

SKIA |
Mariana80 - The principal portion of the payment is the only item that goes to CFF. Remember that interest payments and receipts affect CFO. In this case an interest payment is being made. Therefore, the outflow from CFF (principal) for $1,300 and the outflor from CFO (interest) $1,200 must be summed. |