Question

Zeballos Inc. (Zeballos) has arranged to lease new equipment for its distribution centre. The terms of the lease require Zeballos to pay $475,000 per year for the next eight years. The interest rate for the lease is 6 per cent. The lease comes into effect on December 31, 2017, the last day of the current fiscal year and the first payment is to be made on that day. Subsequent payments are due on December 31 of each year through 2024. Zeballos has provided you with the following balance sheet information on December 31, 2017, before accounting for the new lease.
Current assets........... $ 628,000
Non-current assets........ 4,204,000
Current liabilities......... 496,800
Non-current liabilities ....... 3,400,000
Shareholders' equity....... 935,200

Required:
a. Calculate the current ratio and debt-to-equity ratio for Zeballos, assuming the lease is accounted for as an operating lease (ignore the effect of the lease payments).
b. Calculate the current ratio and debt-to-equity ratio for Zeballos, assuming the lease is accounted for as a capital (finance) lease.
c. Which calculations provide a better representation of Zeballos' liquidity and under lying risk? Explain.
d. Does it matter how Zeballos accounts for its lease (IFRS notwithstanding)? Explain.



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  • CreatedFebruary 26, 2015
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