At the beginning of the year,a firm leased equipment on a capital lease,capitalizing $60,000 in its lease receivable account.The contract calls for December 31 payments of $15,000.The lessor's annual reporting period ends December 31 and the contract reflects 10% interest.The lessee made the first payment as required.The direct method statement of cash flows for the lessor should reflect which of the following in the first year of the lease contract (ignore noncash disclosures)?
A) $15,000 operating cash flow
B) $6,000 operating cash flow;$9,000 investing cash flow
C) $6,000 operating cash flow;$9,000 addition reconciling adjustment
D) $9,000 investing cash flow

Question

Quizplus · Accepted Answer

Under capital lease, the lessor recognizes revenue for the leased equipment as an investment in the lease, which is then reduced as payments are received from the lessee. Here, the lessor has capitalized $60,000 as lease receivable, and the contract calls for four payments of $15,000 each on December 31.

In the first year, the lessor received only one payment of $15,000, and the interest rate is 10%. Therefore, the interest earned by the lessor on the lease is $6,000 (i.e., $60,000 x 10% x 1/4). This interest is reported as operating cash flow in the statement of cash flows.

The leased equipment itself is an investing activity, and therefore the receipt of the lease payment of $15,000 is recorded as an investing cash inflow in the statement of cash flows. Hence, the statement of cash flows for the lessor should show $6,000 under operating cash flow and $9,000 under investing cash flow.

At the Beginning of the Year,a Firm Leased Equipment on a Capital