Question

q.32

Wilson Foods Corporation leased a commercial food processor on September 30, 2018. The five-year finance lease agreement calls for Wilson to make quarterly lease payments of $300,187, payable each September 30, December 31, March 31, June 30, with the first payment at September 30, 2018. Wilson’s incremental borrowing rate is 12%. Wilson records depreciation on a straight-line basis at the end of each fiscal year. Wilson recorded the lease as follows:

September 30, 2018
Right-of-use asset (calculated below)	4,600,000
Lease payable (calculated below)		4,600,000
Lease payable	300,187
Cash (first payment)		300,187

Calculation of the present value of lease payments
$300,187 × 15.32380* = $4,600,000 (rounded)
*Present value of an annuity due of $1: n = 20, i = 3%

Required:
What would be the pretax amounts related to the lease that Wilson would report in its statement of cash flows for the year ended December 31, 2018? (Cash outflows should be indicated by a minus sign. Do not round your intermediate calculations. Enter your answers in whole dollars.)

	Item Reported in Statement of Cash Flows as Amount Right-of-use asset Lease payments: Principal Interest

Answer 1

Solution

Item	Report in statement of cash flows	Amount
Right of use asset		4,600,000
Lease payment
Principal	Outflow from financing activites	($471,380)
Interest	Outflow from operating activites	($128,994)

Working:

		Total	Principal	interest
30.09.2018	First payment	300,187	300,187
31.12.2018	Second payment	300,187	171,193	128,994 (4,600,000 - 300,187)*12%*3/12
	Total	600,374	471,380	128,994

Wilson would report the $4,600,000 investment in the commercial food processor and its financing with a capital lease as a significant noncash investing and financing activity in the disclosure notes to the financial statements

The $600,374 ($300,187 + 300,187)) cash lease payments are divided into the interest portion and the principal portion. The interest portion, $128,994 is reported as cash outflows from operating activities. The principal portion, $300,187 + 171,193, is reported as cash outflows from financing activities

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