When calculating the times interest earned, adjustments should normally be made for existence of operating leases. A portion of rental payments should be reclassified as interest.

Question

Quizplus · Accepted Answer

This is true because operating leases represent a form of financing, and a portion of the rental payments should be reclassified as interest to accurately reflect the company's ability to cover its interest expenses. This adjustment can be made using a capitalization rate based on the company's cost of debt.

When Calculating the Times Interest Earned, Adjustments Should Normally Be