Cuby Corporation entered into a lease agreement for 10 photocopy machines for its corporate headquarters. The lease agreement qualifies as an operating lease in all ways except that there is a bargain purchase option. After the five-year lease term, the corporation can purchase each copier for $1,000, when the anticipated market value of each machine will be $2,500.
Glenn Beckert, the financial vice-president, thinks the financial statements must recognize the lease agreement as a finance lease because of the bargain purchase clause. The controller, Tareek Koba, disagrees: “Although I don’t 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—five years in the future—the machines will most likely not be worth the $1,000 bargain price.
Instructions
Answer the following questions.
(a) Is there an ethical issue at stake? Explain.
(b) Should the controller’s argument be accepted if she does not really know much about copier technology? Would your answer be different if the controller were knowledgeable about how quickly copier technology changes?
(c) What should Beckert do?
(d) What would be the impact of these arguments on the company’s statement of financial position under the contract-based approach for reporting leases? What impact would Koba’s argument have in this case?