Reference no: EM131795591

Problem

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 percent. 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). (Round your answers to 2 decimal places.)

b. Calculate the current ratio and debt-to-equity ratio for Zeballos, assuming the lease is accounted for as a capital (finance) lease. Hint: When accounting for the lease payment cash is reduced and under the operating lease treatment, there is a corresponding increase in prepaid lease payment, which is a current asset and equal to the cash payment. (Round the ratio values to 2 decimal places.)