Question

On January 1, 2019, ABC Company leased office equipment from ZZ, Inc.
The lease terms require annual payments of $20,000 for 20 years with
the first payment being due on December 31, 2019. The interest rate
on the lease is 5%, and ABC will use the double-declining balance
method to record the amortization of the leased asset. Assume the
equipment had a 25 year remaining useful life at January 1, 2019 and
the lease contract requires the equipment to be returned to ZZ, Inc.
at the end of the lease.

Calculate the total amount of cash outflow related to this lease that
would be reported in the operating activities section of ABC Company's
2020 cash flow statement.

Answer 1

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Answer is highlighted in yellow: Solution: Rounding off instruction is not given, can be e.g. 2 decimal or nearest dollar: Present value of annuity payment = PV(5%,20,-20000,0) 249244 Interest expense of 1st payment Decrease in carrying value (249244*5%) (20000-12462) 12462 7538 Carrying value Interest expense of 2nd payment Cash outflow related to lease on Cash flow operating activities (249244-7538) 241706 (241706*5%) 12085 12085 or: 12085.32