Question

On January 1, 2017, the Mount Rogers City water department leases a truck under a noncancelable lease agreement meeting the requirements for classification as a capital lease. The present value (8% interest) of the minimum lease payment is $45000, and the lease calls for five annual lease payments of $10435 every January 1, beginning in 2017. The leased truck has a five year life and no salvage. 1. Prepare journal entries for the first year of the lease. 2. How would the lease be reflected in the Statement of Cash Flows prepared for the enterprise fund for the year ending December 31, 2017?

Answer 1

Journal Entries for First Year

A) Acquisition Entry as on 01/01/2017

Assets on lease a/c Dr. $45,000

To Lessor A/c $45,000

(Lease is recognized at Present of Minimum lease payment i.e. $45,000)

B) 1st year lease Payment (as on 01/01/2017)

Lessor A/c Dr . $ 10,435

TO Bank A/c $10,435

(1st year lease payment paid on 01.01.2017)

C) Depreciation on lease as on 31/12/2017

Depreciation A/c Dr. $ 9,000

To Asset on Lease $9,000

( Lease is for 5 year so the value is depreciated within 5 year)

D) Interest Exp.

Interest Exp. A/c Dr. $2,765

To lessor A/c $2,765

(1st year interest ((45000-10435)*8%)

2) Record the capital lease expense payment on the cash flow statement. ...

The interest portion of the payment is included in the Cash Flows From Operating Activities section as a cash outflow. The principal portion of the payment is included in the Cash Flows From Financing Activities section as a cash outflow.

Hence Interest of $2,765 will show in operating activities section as cash outflow and principal of $10, 435 will include in cash flow from financing activities section as outflow.