On January 1, Lessee Company incorrectly recorded a capital lease as an operating lease.The ratio of debt to stockholders' equity would be

Question

Quizplus · Accepted Answer

Recording a lease as an operating lease instead of a capital lease understates liabilities because the obligation to make future lease payments is not recorded as a liability on the balance sheet. This results in an understated debt to equity ratio, as the debt component is lower than it should be.

On January 1, Lessee Company Incorrectly Recorded a Capital Lease