If a firm capitalizes a lease instead of treating the lease as an operating lease, the effect on the current ratio and the debt-to-equity ratio will be: $$\begin{array} { l c c }
& \text { Current ratio } & \text { Debt-to-equity ratio } \
\text { A) } & \text { Increase } & \text { Increase } \
\text { B) } & \text { No effect } & \text { Increase } \
\text { C) } & \text { No effect } & \text { Decrease } \
\text { D) } & \text { Decrease } & \text { Increase }
\end{array}$$
A)Option A
B)Option B
C)Option C
D)Option D

Question

If a firm capitalizes a lease instead of treating the lease as an operating lease, the effect on the current ratio and the debt-to-equity ratio will be: $$\begin{array} { l c c } 
& \text { Current ratio } & \text { Debt-to-equity ratio } \
\text { A) } & \text { Increase } & \text { Increase } \
\text { B) } & \text { No effect } & \text { Increase } \
\text { C) } & \text { No effect } & \text { Decrease } \
\text { D) } & \text { Decrease } & \text { Increase }
\end{array}$$
A)Option A
B)Option B
C)Option C
D)Option D

Quizplus · Accepted Answer

Capitalizing a lease increases both assets and liabilities on the balance sheet. The current ratio (current assets/current liabilities) decreases because of the increase in current liabilities without an increase in current assets. The debt-to-equity ratio (total liabilities/total equity) increases because total liabilities increase.

If a Firm Capitalizes a Lease Instead of Treating the Lease