C Corp., a lessee, has a rate of return on assets of 10%. The rate of return on assets is immediately increased when C records:
A) Option A
B) Option B
C) Option C
D) Option D

Question

C Corp., a lessee, has a rate of return on assets of 10%. The rate of return on assets is immediately increased when C records: 
A) Option A 
B) Option B 
C) Option C 
D) Option D

Quizplus · Accepted Answer

Both operating leases and finance leases increase assets (ROU asset) and liabilities (lease payable) the same amount and thus have 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.

C Corp, a Lessee, Has a Rate of Return on Assets