On January 1, 2007 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% of the estimated economic life of the machine.
The second lease contains a bargain purchase option. The lease term is equal to 50% of the estimated economic life of the machine.
Required
1. Explain 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.
2. Explain how a lessee should account for a capital lease at its inception.
3. Explain how a lessee should record each minimum lease payment for a capital lease.
4. Explain how Von should classify each of the two leases.