CFA Practice Question
Which of the following is (are) true?
II. The recorded liability in an operating lease equals the present value of the MLPs.
III. The interest expense in a capital lease equals the MLPs.
IV. A capital lease extends a firm's operating capacity without impacting its debt ratios.
I. Operating leases are off-balance-sheet transactions.
II. The recorded liability in an operating lease equals the present value of the MLPs.
III. The interest expense in a capital lease equals the MLPs.
IV. A capital lease extends a firm's operating capacity without impacting its debt ratios.
A. I and IV
B. I, II and III
C. I only
Explanation: Operating leases are OBS transactions and hence, the recorded liability is zero. Capital leases do affect debt ratios, since they are on-balance-sheet instruments. Specifically, they generate entries on both asset and liability sides.
User Contributed Comments 10
| User | Comment |
|---|---|
| danlan | What is MLP? |
| nike | monthly lease payment. |
| cpt28 | actually, it's "minimum lease payment". |
| Hope02 | That's right! |
| steved333 | Interest expense is less than the MLP. It's the interest portion of it... |
| copus | If Off Balance Sheet is abbreviated with OBS - what is On Balance Sheet...aahh....uuurrr.....OBS as well ?? |
| cwa4 | On balance sheet items would simply be balance sheet items |
| tommyguard3 | so you're suggesting balance sheet items are BS? lol. Sorry cram time getting punchy. |
| uahmed | tommyguard3 - i'm not an accountant but understand the appropriate abbreviation to be: B/S |
| Lambo83 | For the non-accountants Analyst Notes shouldn't use abbreviations such as MLP. I got it right but because I wasn't sure what MLP was it was a guess. |