On July 1, Year 1, Dewey Co. signed a 20-year building lease that it reported as

Question

On July 1, Year 1, Dewey Co. signed a 20-year building lease that it reported as a capital lease. Dewey paid the monthly lease payments when due. How should Dewey report the effect of the lease payments in the financing activities section of its Year 1 statement of cash flows? A. The lease payments should not be reported in the financing activities section. B. An outflow equal to the Year 1 principal payments only. C. An inflow equal to the present value of future lease payments at July 1, Year 1, less Year 1 principal and interest payments. D. An outflow equal to the Year 1 principal and interest payments on the lease. On July 1, Year 1, Dewey Co. signed a 20-year building lease that it reported as a capital lease. Dewey paid the monthly lease payments when due. How should Dewey report the effect of the lease payments in the financing activities section of its Year 1 statement of cash flows? A. The lease payments should not be reported in the financing activities section. B. An outflow equal to the Year 1 principal payments only. C. An inflow equal to the present value of future lease payments at July 1, Year 1, less Year 1 principal and interest payments. D. An outflow equal to the Year 1 principal and interest payments on the lease.

Explanation / Answer

The right answer is B.

An outflow equal to the year 1 principal payments only.

Only the principal portion of each lease payment is classified as a financing cash outflow. This portion is a principal payment on debt used to finance the asset.

And the interest portion will be classified as operating cash outflow.

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.