On January 1 2017 Von Company Entered Into Two Non

On January 1, 2017, 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.

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 lessee account for a capital lease at its inception?

c. How should a lessee record each minimum lease payment for a capital lease?

d. How should Von classify each of the two leases? Why?

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