Lessee Accounting and Reporting
Response to the following problem:
On January 1, 2014, Evans Company entered into a noncancelable lease for a machine to be used in its manufacturing operations. The lease transfers ownership of the machine to Evans by the end of the lease term. The term of the lease is 8 years. The minimum lease payment made by Evans on January 1, 2014, was one of eight equal annual payments. At the inception of the lease, the criteria established for classification as a capital lease by the lessee were met.
Instructions
(a) What is the theoretical basis for the accounting standard that requires certain long-term leases to be capitalized by the lessee? Do not discuss the specific criteria for classifying a specific lease as a capital lease.
(b) How should Evans account for this lease at its inception and determine the amount to be recorded?
(c) What expenses related to this lease will Evans incur during the first year of the lease, and how will they be determined?
(d) How should Evans report the lease transaction on its December 31, 2014, balance sheet?