Capital lease question...

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Philly1616

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Debt to Equityis lower with an operating lease because the asset is NOT recognized or debt increased... BUT the lease payment is expensed so wouldn't that lower equity and increase the debt to equity ratio?
If someone can explain... thanks in advance...
 
excellent question...

conceptually it should equalize but their magnitude differs.

when you capitalize the lease, its on the book(BS) of the PV of the lease ..

say you make 3000 lease PMT and imp int is 10% for 10 years, you get PV of the lease at around 18,433... this will be on the BS as asset and debt.

A = L + E
18k = 18k + Eq

and on IS this will be treated as

IS
Inte exp = 1843


If it was OpLease it would affect the IS and subsequently Retained earning of BS by only (3000-1843) = 1156 atleast for initial years.


so D/E of -18k/Eq will affect much more than Dt/Eq-1.1k

Add more to it...
 
(1) So then, is the capitalize lease classified as a fixed asset, i.e. in the same category as PPE?

(2) On the liability side, would it be classifed as long term debt?
 
The liability would be long term except for the PV of that years lease payments which would be short term.
 
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