On January 1, 2017, 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, 2017, 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.
Answer the following questions in the Discussion Board:
- 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.
- How should Evans account for this lease at its inception and determine the amount to be recorded?
- What expenses related to this lease will Evans incur during the first year of the lease, and how will they be determined?
- How should Evans report the lease transaction on its December 31, 2017, balance sheet?
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Accounting for leases. Intermediate accounting (16th ed.). (p. 1251). New York, NY: John Wiley & Sons, Inc.