Task: 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:
Q1. 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.
Q2. Describe how a lessee accounts for a capital lease at inception.
Q3. Explain how a lessee records each minimum lease payment for a capital lease.
Q4. Explain how Von should classify each of the two leases. Provide justification.