(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?