EBIT Income for Interest Coverage purpose= EBIT as reported + operating lease - depreciation remember to add back operating lease amount and then subtract depreciation to get an EBIT income number . Ch 26 of FRA problems 1 to 8. Depreciation is = NPV of the capital lease/ life of the lease
You also have to add the interest portion of the capital lease payment to interest expense.
No, no, because it is EBIT, dont add the Interest Expense portion to get your new EBIT. Adjusted EBIT = Prev EBIT + regular Lease Rental payment - Depreciation on capitalized lease Interest portion of the lease payment will be added to the denominator in EBIT Interest Coverage Ratio. Edit: Thanks janakisri for pointing it out. I think knowing Operating Lease to Capital Lease conversion is very important for L2 exam.
I think that is what bpdulog meant to say…
Yeah, my bad I was referring to the EBIT coverage ratio in case #2.