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Von Company: Long-Term Leases

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On January 1, 2006, Von Company entered into two non-cancelable leases for new machines to be used in its manufacturing operations. The first lease does not contain a bargain purchase option; the lease term is equal to 80 percent of the estimated economic life of the machine. The second lease contains a bargain purchase option; the lease term is equal to 50 percent of the estimated economic life of the machine.

What is the theoretical basis for requiring lessees to capitalize certain long-term leases?

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Solution Preview

There are four criteria to determine whether a lease should be capitalized or not.

1) There's a bargain purchase option ...

Solution Summary

Discusses the theoretical basis for requiring lessees to capitalize on long-term leases.

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