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. Answer the following question: 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. How should Evans account for this lease at commencement? 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?
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. Answer the following question: 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. How should Evans account for this lease at commencement? 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?
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Chapter20: Accounting For Leases
Section: Chapter Questions
Problem 3E: Lessee Accounting Issues Sax Company signs a lease agreement dated January 1, 2019, that provides...
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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.
Answer the following question:
- 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.
- How should Evans account for this lease at commencement?
- 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?
- How should Evans report the lease transaction on its December 31, 2020, balance sheet?
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