You are an accountant for the 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 the 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 five 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 eight 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 Mining 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 three years of the lease.
Required
From financial reporting and ethical perspectives, discuss the issues raised by this situation.