Question
(Lease Capitalization, Bargain Purchase Option) Baden Corporation entered into a lease agreement for 100 photocopy machines for its corporate headquarters. The lease agreement qualifies as
(Lease Capitalization, Bargain Purchase Option) Baden Corporation
entered into a lease agreement for 100 photocopy machines for its corporate headquarters. The lease
agreement qualifies as an operating lease except there is a bargain purchase option. After the 5-year
lease term, the corporation can purchase each copier for $1,000, when the anticipated fair value is
$2,500.
Jerry Suffolk, the fincial vicepresident, thinks the financial statements must recognize the lease
agreement as a fInance lease because of the bargain purchase option. The controller, Diane Buchanan,
disagrees: Although I dont know much about the copiers themselves, there is a way to avoid recording
the lease liability. She argues that the corporation might claim that copier technology advances rapidly
and that by the end of the lease term, the machines will most likely not be worth the $1,000 bargain price.
Instructions
a. What ethical issue is at stake?
b. Should the controllers argument be accepted if she does not really know much about copier technology?
Would it make a difference if the controller were knowledgeable about the rate of change in
copier technology?
c. What should Suffolk do?
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