Snappy Corporation enters into a lease agreement with Long Leasing. Long requires that the lease qualify as

Question:

Snappy Corporation enters into a lease agreement with Long Leasing. Long requires that the lease qualify as a sale. Snappy can fill this requirement by either guaranteeing the residual value itself or having a third party guarantee the residual value. Self- guarantee of the residual value will result in a capital lease to Snappy. The third- party guarantee will allow Snappy to report the lease as an operating lease (off– balance sheet financing).

Team 1: Argue for recording the lease as a capital lease. Your arguments should take into consideration the definition of relevant elements of financial statements found in SFAC No. 6 , representational faithfulness, and the substance and form of the lease transaction. In addition, discuss the ethical implications of selecting this alternative as opposed to the operating lease.

Team 2: Argue for treating the lease as an operating lease. Your arguments should take into consideration the definitions of relevant elements of financial statements found in SFAC No. 6, representational faithfulness, and the substance and form of the lease transaction. In addition, discuss the ethical implications of selecting this alternative as opposed to the capital lease.

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