Liberty Inc. routinely leases equipment made by competitors and reverse-engineers design features in its own...
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Liberty Inc. routinely leases equipment made by competitors and reverse-engineers design features in its own products. The reverse-engineering process is part of Libertys 6-month product development cycle and involves disassembling then later reassembling the equipment. LeaseUSA leases such equipment to Liberty under a 12-month lease term. The payments have a fair value of $1,000,000 and the equipment has a fair value of $4,000,000. At the end of the lease term, Liberty has the option to purchase the equipment for $2,000,000, which is less than its expected fair value at that time. There is no internal use for the competitor equipment at the end of Libertys product development cycle, and Libertys management focuses solely on the manufacture and sale of its own equipment. Management also wishes to minimize liabilities reported on the balance sheet. In light of the above, what is the value of LeaseUSAs credit entry on the day the lease contract starts?
a.
$1,000,000
b.
$4,000,000
c.
Not enough information to decide.
d.
$2,000,000
e.
$0
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