Impact of Transactions Involving Capital Leases on Statement of Cash Flows Assume that Garnett Corporation signs a lease agreement with Duncan Company to lease a piece of equipment and determines that the lease should be treated as a capital lease. Garnett records a leased asset in the amount of $53,400 and a lease obligation in the same amount on its balance sheet.

Required
1. Indicate how this transaction would be reported on Garnett’s statement of cash flows.
2. In the following list of transactions relating to this lease, identify each item as operating (O), investing (I), financing (F), or not separately reported on the statement of cash flows (N). ____________ Reduction of lease obligation (principal portion of lease payment)
____________ Interest expense
____________ Depreciation expense—leased assets