Problem:
Sandra Company and Nova Inc. each signed lease agreements on January 1, 2014. Nova’s lease qualified for capital lease treatment, but Sandra’s lease did not. All other information for both companies is identical. Payments on each lease were due at the end of each year. The following information is from each company’s December 31, 2013, financial statements:
Sandra Nova
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Current assets $2,000 $2,000
Total assets 5,000 5,000
Current Liabilities 2,000 2,000
Total Liabilities 2,500 2,500
Sales 10,500 10,500
Required:
1. Based on this information, what will be the impact of the lease transaction on Nova’s current ratio and debt-to-equity ratio on January 1, 2014, immediately after signing the lease?
2. What will be the impact on the total asset turnover ratio for 2014?
3. How would Sandra’s ratio effects differ from Nova’s?