1. A company leases machinery and properly classifies the leases into capital leases. The leases have a ten-year term and the lease calculations were done three years ago when interest rates were lower. Which of the following is the appropriate accounting treatment, if any, for the application of the fair value option to lease transactions?
a. Leases are not eligible for the fair value option.
b. Recognize the change to fair value accounting with a cumulative adjustment to beginning retained earnings.
c. Recognize the change to fair value accounting with an unrealized loss in the income statement.
d. Recognize the change to fair value accounting with an unrealized loss in accumulated other comprehensive income.