Question

Star Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1 before entering into an operating lease. Not including any indirect effects on earnings, when Star Corp. records the operating lease, the immediate impact on these ratios is a(an):

Answer 1

The return on assets and debt/equity ratio does not change

Step-by-step explanation:

An operating lease does not affect assets and liabilities. From the formula:

Equity = Assets - Liabilities, since both assets and liabilities are not affected (they remain unchanged) therefore the equity is also the same.

The debt/ equity ratio = total liabilities/total equity. Since liabilities and equity remain unchanged, therefore The debt/ equity ratio is the same.

Also the return of assets (earnings/assets) remain the same