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Basic Question 2 of 16
Which of the following statements concerning the effect on the lessee immediately after erroneously recording a leased asset as an operating lease rather than a capital lease is true?
B. The return on equity (ROE) ratio is understated.
C. The debt-to-equity ratio is understated.
A. The return on equity (ROE) ratio is overstated.
B. The return on equity (ROE) ratio is understated.
C. The debt-to-equity ratio is understated.
User Contributed Comments 9
| User | Comment |
|---|---|
| kuan | Does not affect Equity but Asset |
| danlan | Does not affect income neither, so ROE is not changed. |
| danlan | Previous comment may be wrong, it affects income. I think it makes income lower in early stage (because of interest expense), so ROE is understated? |
| Done | C is correct because no entry is made at the inception of the lease. The leasehold asset and leasehold liability equal the PV of the lease payments. I think? |
| mtcfa | I thnk the important factor in this question is the word immediately... the actual lease payment would not be recorded until it actually took place, thereby not immediately affecting net income. The balance sheet items, however, would be affected immediately. |
| malawyer | I support mtcfa - it depends on the timing, just like dividends being declared or paid... |
| antihead | It does affect income and hence the return on equity. however, the question asks what is happening immediately after....at this point the annual depreciation is yet to be made. |
| quanttrader | capital lease - take on debt, op lease - take on no debt |
| gill15 | That is tricky --- to realize that we havent taken depreciation expense into account...good pickup antihead... antihead....haha...best name ever....i needed that cfa break.. |
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Learning Outcome Statements
explain the financial reporting of leases from the perspectives of lessors and lessees
CFA® 2025 Level I Curriculum, Volume 2, Module 8.