On January 1, 2014, Von Company entered into two noncancelable leases for new ma

Question

On January 1, 2014, Von Company entered into two noncancelable 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 precent of the estimated economic life of the machine.

The second lease contains a bargain purchase option; the lease term is equal to 50 precent of the economic life of the machine.

Required:

a. What is the theoretical basis for requiring lessees to capitalize certain long-term leases? Do not discuss the specific criteria for classifying a lease as a capital lease.

b. How should a lease account for a capital lease at its inception?

Explanation / Answer

a. When a lease transfers, greatly the entire risks and advantages incident to the possession of property to the lessee, it should be capitalized by way of the lessee. The monetary outcomes of such a hire on the lessee is an identical, in most of the cases, related to the purchase of an installment.

b. Von should account for this rent at its inception as an asset and an duty at an quantity equal to the gift worth on the opening of the rent term of minimal rent repayments for the duration of the hire term, aside from that component of the payments representing executory expenditures, along with any profit thereon. Nevertheless, if the amount so decided exceeds the fair worth of the leased computer with the lease being incepted, asset would be the amount recorded and responsibility should be the computing device's fair price.

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