Copy Corporation entered into a lease agreement for 25 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 four-year lease term, the corporation can purchase each copier for $1,200, when the anticipated market value of each machine will be $3,600. Glenn Beckirtt, one of the chief accountants, thinks the financial statements must recognize the lease agreement as a finance (capital) lease because of the bargain purchase clause. One of the head accountants, Tara Kobban, 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 – four years in the future – the machines will most likely not be worth the $1,200 bargain price. Required: Following the case format, please address 3 primary issues.
Copy Corporation entered into a lease agreement for 25 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 four-year lease term, the corporation can purchase each copier for $1,200, when the anticipated market value of each machine will be $3,600.
Glenn Beckirtt, one of the chief accountants, thinks the financial statements must recognize the lease agreement as a finance (capital) lease because of the bargain purchase clause. One of the head accountants, Tara Kobban, 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 – four years in the future – the machines will most likely not be worth the $1,200 bargain price.
Required:
Following the case format, please address 3 primary issues.
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