If a lease transaction is accorded capital lease treatment rather than operating lease treatment, it would have what impact on the following financial items of the lessee?
$\begin{array}{ccc}
& & & \text {Return on} \
& \text {Reported Debt} &\text { Total Assets} &\text { Total Assets }\\end{array}$

Question

If a lease transaction is accorded capital lease treatment rather than operating lease treatment, it would have what impact on the following financial items of the lessee? 
$\begin{array}{ccc}
 & & & \text {Return on} \
 & \text {Reported Debt} &\text { Total Assets} &\text { Total Assets }\\end{array}$

Quizplus · Accepted Answer

Capital lease treatment increases reported debt and total assets because the leased asset and corresponding liability are recorded on the balance sheet. Return on total assets decreases because the increase in assets (denominator) is larger proportionally than any increase in net income (numerator), reducing the ratio.