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Explain how Von Company should classify each of two leases

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1. On January 1, Year 8, Von Company entered into two non-cancellable leases of new machines for use in its manufacturing operations. The first lease does not contain a bargain purchase option, and the lease term is equal to 80% of the estimated economic life of the machine. The second lease contains a bargain purchase option, and the lease term is equal to 50% o the estimated economic life of the machine.
Required:

a. Explain the justification for requiring lessees to capitalize certain long-term leases. Do no limit your discussion to the specific criteria for classifying a lease as a capital lease.

b. Describe how a lessee accounts for a capital lease at inception.

c. Explain how a lessee records each minimum lease payment for a capital lease.

d. Explain how Von should classify each of the two leases. Provide justification.

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Solution Summary

Your tutorial is 288 words and explains the four criteria, the reason for capitalizing in general and how the two leases should be classified and why.

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a. Explain the justification for requiring lessees to capitalize certain long-term leases. Do no limit your discussion to the specific criteria for classifying a lease as a capital lease.

Leases that convey most of the rights and obligations of ownership are classified as purchases with debt rather than true leases. That is, the substance, rather than the form, of the exchange is to finance the purchase of an asset and not to just give short term use to the user with the ability to stop the arrangement within ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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