Plevna Inc. (Plevna) is a small, publicly owned manufacturing company in eastern Canada. In 2014, Plevna’s management decided to acquire additional manufacturing equipment to meet increasing demand for its products. However, instead of purchasing the equipment, Plevna arranged to lease the equipment. The lease came into effect on December 1, 2013. In its 2014 financial statements, Plevna accounted for the leases as operating leases. You have obtained Plevna’s summarized balance sheets and income statements for 2013 and 2014.

Had Plevna accounted for the equipment leases as capital leases, the following differences would have occurred in the 2014 financial statements:
* No lease expense would have been recorded.
* The leased equipment would have been recorded on the balance sheet as capital assets for $460,000. The equipment would have been depreciated straight line over 10 years.
* Al iability of $460,000 would have been recorded at the inception of the lease.
On November 30, 2014, the current portion of the liability would have been $75,000. The interest expense arising from the lease would have been $46,000.
On November 30, 2014, the remaining liability, including the current portion would have been $431,000.
¢ There would be no effect on the tax expense for the year.
Required:

a. Prepare revised financial statements, assuming that Plevna treated the leases as capital leases instead of as operating leases.

b. Calculate the following ratios, first using the financial statements as initially prepared by Plevna and then using the revised statements you prepared in part (a):
i. debt-to-equity ratio ii. return on assets iii. return on equity iv. profit margin ratio v. current ratio vi. asset turnover vii. earnings per share Vili. interest coverage ratio

c. Discuss the differences between the two sets of ratios you calculated in (b). Why are the ratios different? How might users of the financial statements be affected by these differences? Which set of ratios gives a better perspective on the performance, liquidity, and leverage of Plevna? Explain.

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Plevna Inc. Summarized Balance Sheets as of November 30, 2014 2013 Cash $ 212 $ 276 Inventory Accounts receivable Capital assets (net) Other non-current assets 695 608 1,825 1,547 2,895 2,652 375 442 Total assets $6,002 $5,525 Current liabilities $1,728 $1,823 Long-term debt 990 950 Share capital (1,000,000 shares outstanding) 1,200 1,200 Retained earnings . 2,084 1,552 Total liabilities and shareholders' equity $6,002 $5,525