Question: Lease Accounting. Union Pacific Corp. opened its new 19-story, $260 million headquarters in Omaha, Nebraska. The railroad operator is the owner of the city's largest building, the Union Pacific Center. Under an initial operating lease, Union Pacific guaranteed 89.9 percent of all construction costs through the building's completion date. After completing the building, the company signed a new operating lease, which guarantees 85 percent of the building's costs. Both were "synthetic" leases, which allow the company to take income tax deductions for interest and depreciation while maintaining complete operational control (Jonathan Weil, "Open Secrets: How Leases Play a Shadowy Role in Accounting," The Wall Street Journal, September 22, 2004). Required:

a. Explain why Union Pacific would want to structure the lease to be an operating lease.

b. What audit evidence would you require for testing the appropriate accounting for this lease?