On January 1, 2011, Von Company entered into two noncancelable leases for snew 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?