The SAS Co. entered into a lease on 1/1/09 with semiannual payments beginning 6/30/09. The leased equipment had a cost/FMV at inception of $1.2 million. Further assume that SAS knew the lessor's implicit rate of 6%. SAS has treated this as an operating lease from the very beginning. Their auditors barely looked at this lease at 12/31/09 (SAS year-end). SAS has new auditors for their 12/31/10 audit, and the auditors are telling SAS that this lease should have been recorded as a capital lease on 1/1/09. How are you going to fix this mess? It must be a correction of an error, but how are you going to do this since the 2009 books were closed a long time ago? Assume that the 12/31/10 books are still open and that SAS has made their rental payments all on time.

Tell the class how you would go about correcting this error.