You are an accountant for ABC Mining Company and the CFO gives you a copy of a recent lease agreement to record. As you read the agreement, you discover the company has leased 12 trucks from XYZ Finance CO. The fair Value of the trucks is $2.4 million. ABC has agreed to pay $250,000 semiannually, in advance. The lease term is 5 years, and the lessor's implicit rate is 8%. There is no option or requirement to purchase the trucks. This all seems straightforward, especially when you remember that the company recently borrowed from a bank and agreed to a 10% interest rate. Also, you recall that the company owns some similar trucks and depreciates them over 8 years. You are about to leave the office early to meet some friends when you notice that there is a contingent rental of $97,592, payable by ABC and starting with the seventh semiannual payment, if the consumer price index prevailing at the beginning of the lease increases in any one of the first 3 years of the lease.

Required:

From financial reporting and ethical perspectives, discuss the issues raised by this situation.