S Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1. The immediate impact of recording a finance lease on these ratios is a(n):
A) Option A
B) Option B
C) Option C
D) Option D

Question

S Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1. The immediate impact of recording a finance lease on these ratios is a(n): 
A) Option A 
B) Option B 
C) Option C 
D) Option D

Quizplus · Accepted Answer

A finance lease increases assets and liabilities the same amount and thus has no effect on equity, which is A minus L = Equity. Because assets, the denominator, increase and earnings remain the same, the rate of return decreases. In the debt/equity ratio, the numerator is increased with no effect on the denominator and the ratio increases.

S Corp Has a Rate of Return on Assets of 10