At the beginning of the year, a firm leased equipment on a capital lease, capitalizing $60,000 in both its lease liability and leased assets accounts. The contract calls for payments each December 31 of $15,000. The lessee's annual reporting period ends December 31 and the contract reflects 10% interest. The lessee made the first payment as required. Which of the following should be reflected on the statement of cash flows under the indirect method for the first year of the contract (ignoring noncash disclosures)?
A) $15,000 financing cash outflow
B) $15,000 operating cash outflow
C) $6,000 operating cash outflow; $9,000 financing cash outflow
D) $9,000 addition in the reconciliation of earnings and net operating cash flow

Question

Quizplus · Accepted Answer

The lease payments of $15,000 are split between financing cash outflows (the portion related to interest expense) and operating cash outflows (the portion related to reducing the lease liability). To determine the interest portion of the payment, multiply the lease liability balance at the beginning of the year ($60,000) by the interest rate (10%), which equals $6,000. Subtracting this amount from the lease payment of $15,000 leaves $9,000, which represents the reduction in the lease liability and is classified as an operating cash outflow. Therefore, the correct answer is C: $6,000 operating cash outflow; $9,000 financing cash outflow.

At the Beginning of the Year, a Firm Leased Equipment