Burton Manufacturing Company leases equipment from NelsonLeasing for an annual lease rental of $100,000. Thelease term is five years and the equipment has a useful life offive years and no residual value. According to the GAAP, thislease should be treated as a finance lease. Burtoninadvertently records the lease as an operating lease. Question 1. Why Burton's practice is referred to as "off-balance-sheet financing"? 2. Compare the effect of the two methods on thefollowing ratios by first listing the effect (higher or lower) inthe following table and then briefly explain the differences foreach item.
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Operating Profit |
Net Profit in early years |
Operating assets turnover |
Longterm debt to equity ratio |
Times interest earned |
| Operating Lease |
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|
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| Finance Lease |
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3. Explain the rationale behind each of the followingaccounting principle a. Using LIFO for inventory costing in an inflationaryeconomy b. Using accelerated depreciation method to determine annualdepreciation expense c. Treating goodwill as an asset but not amortizing it. d. Lower of cost or market principle for inventoryreporting.