What Is the Effect of Classifying a Lease as an Operating

question 26

Short Answer

What is the effect of classifying a lease as an operating lease, as opposed to as a finance lease, on the debt to equity ratio and times-interest-earned ratio? $\begin{array}{lll}& \text { Debt to equity ratio}& \text {Times-interest-earned ratio }\\\hline\text { a. } & \text { Overstated } & \text {Overstated } \\\text { b. } & \text { Overstated } & \text { Understated } \\\text { c. } & \text { Understated } & \text { Overstated } \\\text { d. } & \text { Understated } & \text { Understated }\end{array}$

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Definitions:

Bilateral Dissolution

Refers to the mutual agreement between two parties to end or dissolve a relationship or agreement.

Unhappiness

A state of dissatisfaction or sadness, often resulting from unmet expectations or difficulties in one’s life or surroundings.

Cost Escalation

The process whereby individuals continue to invest in a decision or project despite evidence of its failing prospects, influenced by prior investments.

Pseudo-De-Escalation

A perceived reduction in conflict or tension that does not actually resolve the underlying issues, potentially leading to further conflict.