liabilities (schweser exam q) understand, statements

waldziuchna

I don’t understand, how is the franchise capitalized, and amortized, but the franchise is not counted as debt. Does anyone know why is the franchise not counted as debt (which would presumably add $10m  $2m amortization)?
Selected information from Yorktown Corp.’s financial statements for the year ended December 31, 2004 was as follows (in $ millions):
Accounts Payable
8
Longterm Debt
9
Common Stock
17
Retained Earnings
23
Total Liabilities & Equity
57
In 2004, Yorktown paid $10 million cash to purchase a franchise. The franchise cost was fully expensed in 2004. If the company had elected to amortize the franchise cost over 5 years instead of expensing it, Yorktown’s total debt ratio (total debttototal capital) would:
A) increase from 0.474 to 0.551.
B) decrease from 0.298 to 0.262.
C) decrease from 0.474 to 0.403.
Your answer: C was incorrect. The correct answer was B) decrease from 0.298 to 0.262.
Total capital equals total assets which must equal total liabilities and equity. Yorktown’s total debt ratio was (($8 + $9) / $57 =) 0.298. If the franchise cost were amortized, retained earnings would be increased $8 million ($10 cost less ($10 / 5 =) $2 million of amortization.) The total debt ratio would change to (($8 + $9) / ($57 + $8) =) 0.262.

sabre

Franchise is an asset.

SeanWest

In addition only B) makes sense  by elimination  in the first place the ratio was 0.298.

sabaruch

lzen5 capitalize is to add something to your assets like interest. making a prepaid expense is a deferred expense and does not involve capitalization since capitalization is usually for long term assets