Compared to an operating lease a capital lease will have what effects on operating i
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Compared to an operating lease, a capital lease will have what effects on operating income (earnings before interest and taxes) and net income in the first year？
A.Both will be lower.
B.Both will be higher.
C.One will be lower and one will be higher.
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Ans:C.
With an operating lease, the entire lease payment (rent expense) is subtracted from operating income.With a capital lease, only depreciation is subtracted from operating income, so operating income is higher with a ca[ital lease.Net income in the first year is lower with a capital lease because the sum of depreciation (operating expense) and interest (non-operating expense) is greater than the lease payment.