What liability is the capital lease amount recorded under on the balance sheet? Shor-term or long term? If it is recorded as a long term liability, why would the current ratio be lower?
The PV of the lease payments is treated as debt and is a current liability. Someone correct me if that is wrong.
http://pages.stern.nyu.edu/~ADAMODAR/New_Home_Page/AccPrimer/lease.htm I found that link a lot more helpful than my materials for helping me get leases straight in my head.
PV(MLP) becomes the Current Assets and Current Liability in Balance Sheet for Capital Lease and CR = CA/CL CR1 = CA/CL [assume CR1 > 1.0] CR2 = (CA + x)/(CL + x) [CRs2 decreases if CR1 > 1.0] i.e if both are increase by an equal amount and if the CR > 1 then CR goes down. - Dinesh S
In the Liability - there is a Current portion, as well as a Long term portion, technically split as something payable in the current accounting period, vs. what is due in the future… So both Current Liability and LT Liability go up with a Capital Lease.
Dinesh, I am not sure the assets are declared as current assets. If the capital lease is for 10 years, shouldn’t it be treated as a long-term asset?
Present Value (Minimum Lease Payment) is a Current Asset/ Liability, probably? [Present Value (Total Lease Obligation) - Current Liab] goes to Long-term debt in Balance sheet? Correct me if I am wrong? - Dinesh S
What I deduce from the shweser notes is that current ratio always goes down in case of the capital lease and not just when the current ratio is greater than 1. So it has to be a long-term asset and so only the current liability goes up as cpk123 explained.
you guys got this figured out, but i was just reading through leases, so figured i’d post what i thought… my understanding is that when you take on an capital lease, assets and liabilities increase by the amount = to the MLP. MLP=PV of your lease payments=Lease liability, the lease liability is amortized over the term of the lease. since you don’t amortize/depreciate current assets, the asset is considered a l/t asset. so current assets are unaffected, but current liabilities are affected because the the current portion of principal pmt due within 12 mos. is characterized as a current liability. the current portion of principal pmt due within 12 mos. is determined by subtracting the current period interest exp of the lease liability from the current period lease payment. so, after all that, you have: no change to current asset / increase in current liability = decrease in the current ratio.
Budfox posted a nice link… This guy is pretty famous ( & expensive too) for his finance trainings/classes. Look at this… You can find online video for his classes free… http://pages.stern.nyu.edu/~ADAMODAR/New_Home_Page/