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 to: $$\begin{array} { | l | l | l | }
\hline & \text { Current Ratio } & \text { Debt-to-Equity Ratio } \
\hline \text { A) } & \text { Increase } & \text { Increase } \
\hline \text { B) } & \text { No effect } & \text { Increase } \
\hline \text { C) } & \text { No effect } & \text { Decrease } \
\hline \text { D) } & \text { Decrease } & \text { Increase } \
\hline
\end{array}$$
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 to: $$\begin{array} { | l | l | l | } 
\hline & \text { Current Ratio } & \text { Debt-to-Equity Ratio } \
\hline \text { A) } & \text { Increase } & \text { Increase } \
\hline \text { B) } & \text { No effect } & \text { Increase } \
\hline \text { C) } & \text { No effect } & \text { Decrease } \
\hline \text { D) } & \text { Decrease } & \text { Increase } \
\hline
\end{array}$$
A) Option A
B) Option B
C) Option C
D) Option D

Quizplus · Accepted Answer

Capitalizing a lease (treating it as a finance lease) will increase both the assets and liabilities on the balance sheet, leading to a decrease in the current ratio (current assets/current liabilities) and an increase in the debt-to-equity ratio (total liabilities/total equity). Option A is incorrect because the current ratio will decrease, not increase. Option B is incorrect because the debt-to-equity ratio will increase. Option C is incorrect because the debt-to-equity ratio will increase, not decrease.

If a Firm Capitalizes a Lease Instead of Treating the Lease