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What is effect of signing lease on Samsing leverage ratio

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Reference no: EM133052728

Question - Samsing Plc. signed a lease contract for an office building on 31st December 2016. The contract is for 3 years. The rent paid at the end of each year of the lease (i.e., on 31st December 2017, 2018 and 2019) is £10,000. The leverage ratio of Samsing, immediately before signing the lease was 0.5. What is the effect of signing the lease on Samsing's leverage ratio?

a. If the lease is treated as an operating lease the leverage ratio will not change as the contract is signed, but if the lease is treated as a capital lease then the leverage ratio will decrease.

b. Irrespective of how the lease contract is accounted for (operating lease or capital lease), the leverage ratio will not change when the lease contract is signed.

c. If the lease is treated as an operating lease the leverage ratio will not change as the contract is signed, but if the lease is treated as a capital lease then the leverage ratio will increase.

d. If the lease is treated as an operating lease the leverage ratio will not change as the contract is signed, but if the lease is treated as a capital lease then the leverage ratio may increase or decrease.

e. Irrespective of how the lease contract is accounted for (operating lease or capital lease), the leverage ratio will increase.

Reference no: EM133052728

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