Why do lessees tend to prefer the operating lease method to the capital lease method?
A)The capital lease method results in larger long-term debt and debt-equity ratios during the life of a lease than the operating lease method.
B)A larger debt ratio makes a firm appear more risky.
C)The operating lease method recognizes expense more slowly over the life of the lease than the capital lease method.
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

The operating lease method is preferred by lessees because it does not add to the long-term debt on the balance sheet, making the company appear less risky compared to using the capital lease method. This approach also spreads the expense recognition over the life of the lease, avoiding the front-loading of expenses that occurs with capital leases.

Why Do Lessees Tend to Prefer the Operating Lease Method