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.

You will need to use the time value of money table factors

Answer 1

The current lease is a finance lease as asset lease is more than 75% of the asset lease

Present Value of all lease payments for 20 years = 249,244 (using the time value of money)

First year

Total lease payment = $20,000

Interest component =$12462

Lease liability = $7538

2nd year

Total lease payment = $20,000

Interest component - $12,085

Lease liability = $7,914

However, none of the above items (interest or lease liability) falls under operating activity. Interest and the lease component gets reported under financing activity in the cash flow. Depreciation is a non cash like item.