ABC company enters into a lease agreement with XYZ corporation for laser tech machines. The lease agreement qualifies as an operating lease. However, there is one thing that stands out. There is a bargain-purchase option. After the 3-year lease term, each laser tech machine can be purchased for $500, even though the market value is $850.

A new controller of ABC company just started working. The controller feels that the machine should be recorded as a capital lease because of the bargain-purchase option. Her manager, Martha, feels that at the end of the 3-year term, the laser tech will not be worth $500 because of rapid advances in technology.

• What is the ethical issue?
• what should the controller do?
• What are the generally accepted accounting principles (GAAP) for reporting a lease as a capital lease?