Lessees prefer to account for their leases as operating leases because:
A)This decreases the amount of liability reported
B)This increases their debt to total equity ratio
C)This decreases the income tax expense.
D)This increases the amount of total assets.

Question

Quizplus · Accepted Answer

Lessees prefer to account for their leases as operating leases because it decreases the amount of liability reported. This is because operating leases are not recorded on the balance sheet as a liability, unlike finance leases. As a result, it leads to a lower reported debt-to-equity ratio, which is desirable for the companies as it indicates a lower financial risk. Additionally, this can lead to tax advantages as well, as lease payments are treated as operating expenses and are tax-deductible.

Lessees Prefer to Account for Their Leases as Operating Leases