On January 1, 2020, Evans Company entered into a non-cancelable lease for a machine to be used in its manufacturing operations. The lease transfers control of the machine to Evans by the end of the lease term. The term of the lease is 8 years, which equals the useful life of the asset. The lease payment made by Evans on January 1, 2020, was one of eight equal annual payments. At the commencement of the lease, the criteria established for classification as a finance 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 finance lease.

b. How should Evans account for this lease at its commencement?

c. What expenses directly related to lease liability and right-of-use asset will Evans incur during the first year of the lease, and how will these expenses be determined?

d. How should Evans report the lease transaction on its December 31, 2020, balance sheet?