The Queen’s Inn’s financial situation at the end of 20X3 and 20X4 is summarized as follows:

20X3 20X4 Owner’s equity $5,000,000 $5,200,000 Total property and equipment (fixed assets) 5,900,000 6,000,000 Total assets 6,000,000 6,750,000 Interest expense (for the year) 575,000 625,000 Rent expense 200,000 225,000 Income taxes (for the year) 350,000 420,000 Net income (for the year) 525,000 550,000 On January 1, the Queen’s Inn leased adjoining sporting facilities for its guests’ use. The lease was negotiated so that the lease was not capitalized, since none of the capitalization criteria were met. However, if they had been met, the above accounts would have been affected at the end of 20X4 as follows:
@ Total property and equipment would have increased by $900,000 ® Total assets would have increased by $900,000 # Interest expense for 20X4 would have increased by $80,000 Note: Income taxes and net income would not be affected because rent expense of $125,000 (for the operating lease) would equal the depreciation of $45,000 and interest expense of $80,000 (for the capitalized lease).
Required:
1. Calculate the following ratios given the fact that the Queen’s Inn did not capitalize the lease of the sporting facilities:

a. Return on fixed assets

b. Return on total assets

c. Fixed charge coverage ratio

d. Return on owners’ equity 2. Calculate the ratios listed in question for the Queen’s Inn assuming that the lease was capitalized.
3. Based on your calculations, was the Queen’s Inn wise in negotiating an operating lease? Why or why not?