as titled, say if I have EBIT of 1000, original interest of 50, old lease cost per year of 500, if i have 6% interest rate, 10 years, total capitalized lease cost of 3690, why am I calculating interest coverage as
adjusted EBIT (1000+500-3680/10)
adjusted interest 50+6%*3680
I think I am confused by the 3680/10 vs 3680*6% difference
I’m a bit confused. Why do you need to deduct 3680/10 (the depreciation) in adjusted EBIT? Wouldn’t the depreciation debit Lease liability account directly rather than post as Depreciation expense that is included in EBIT?
Under a finance lease you have essentially purchased an asset on credit. You have an asset which you depreciate and a liability which you amortize. The depreciation and amortization needn’t be equal.