Cash Flow Treatment of Capital Leases—Lessor
On January 1, 2008, Delhi Club Company purchased some equipment for $45,372 in cash. Delhi Club immediately leased the equipment; Delhi Club is the lessor. The lease contract calls for the receipt of $10,000 payments at the end of each year for five years. The residual value of the equipment at the end of the 5 year lease term is expected to be $8,000. The rate implicit in the lease is 8%. Except for lease related items, there were no changes in current operating assets or liabilities during the year; no purchases or sales of property, plant, or equipment; and no dividends paid, stock issued, or loans obtained or repaid. The equipment has a total useful life of 10 years with no salvage value. Prepare a complete statement of cash flows for Delhi Club for 2008 using the indirect method of reporting operating cash flow assuming that the lease is accounted for as (1) an operating lease (net income was $50,000), (2) a direct financing lease (net income was $48,167), and (3) a sales type lease (net income was $48,167; for comparability, make the unreasonable assumption that sales and cost of good sold are the same amount).