Therefore qmarts total liabilities would be lower and

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Unformatted text preview: , –SE) Depreciation (–A) 7,985.40 Accumulated 7,985.40 Record depreciation of capitalized asset for 2014. Lease Liability (­L) Interest Expense (E, ­SE) 8,573.36 1,426.64 Cash (­A) 10,000 Made lease payment for 2014. Depreciation Expense (E, –SE) Depreciation (–A) 7,985.40 Accumulated 7,985.40 Record depreciation of capitalized asset for 2015. Lease Liability (­L) Interest Expense (E, ­SE) Made lease payment for 2015. 9,260.00 740.00 Cash (­A) 10,000 c. Classifying the lease as an operating lease would give rise to both higher net income and a lower debt/equity ratio. By classifying the lease as an operating lease, net income would be reduced during 2011 by $10,000 [from part (a)] for rent expense. Alternatively, classifying the lease as a capital lease would reduce net income by a total of $11,179.56 [from part (b)] for the interest expense associated with the lease and for the depreciation associated with the capitalized asset. Future obligations under operating leases are not disclosed in a company's financial statements as a liability. Consequently, an operating lease would not affect a company's total liabilities. On the other hand, the present values of future lease obligations are reported as liabilities under capital leases, which means that a capital lease results in increased liabilities compared to an operating lease. In addition, the differential effect of capital and operating leases on net income will affect total stockholders' equity through Retained Earnings. Specifically, the balance in Retained Earnings, and thus total stockholders' equity, will be higher by classifying the lease as an operating lease as opposed to classifying it as a capital lease. Therefore, Q­Mart’s total liabilities would be lower and its stockholders' equity higher if the lease were classified as an operating lease rather than as a capital lease. This means that classifying the lease as an operating lease would yield a lower debt/equity ratio. At the end of the useful life both will be equal. E11–23 a. Annual Rental Expense = Rental Expense per Car Number of Cars = $10,000 100 cars = $1,000,000 b. Present Value...
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This homework help was uploaded on 03/03/2014 for the course ACCT 5053 taught by Professor Staff during the Fall '08 term at Oklahoma State.

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