Chapter 21, Problem 5CA

To determine

Lease: A contractual arrangement between the owner of the asset and the user of the asset for a fixed amount of money is termed lease. In this contract the owner of the asset permits the user to use the property for a fixed sum of money received at the time of handing over the asset. At the end of the contract tenure the user of the asset need to return the asset to the owner. The parties involved in the contract are termed the lessor the owner of the asset and the lessee the user of the asset.

Capital lease method: A process of using the asset for a rental payable in installments along with interest and gets the ownership of the title at the end of the lease contract is termed capital lease. In this, the owner of the asset or the lessor need not bear expenses like depreciation, insurance, maintenance and repair. All these expenses need to be paid by the lessee. In a nutshell, capital lease is like an installment sale.

Case summary: B Corporation created a lease agreement for 10 photocopying machines and the amount of minimum payment lease includes bargain purchase option. The financial vice president of the company wishes to consider the lease as capital lease, but the controller Ms.B wants to consider it as operational lease. She further argues that the photocopying machine may become obsolete in future which may or may not be purchased by the company. Therefore, consider it as operational lease.

(a)

To determine the ethical issue in stake in the case given below.

To determine

(b)

To determine whether to accept or reject the suggestion of the controller regarding the lease.

To determine

(c)

To determine how the financial vice president should react in this case.