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Q1CA_b.

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Intermediate Accounting (Kieso)
Found in: Page 1251

Short Answer

(Lessee Accounting and Reporting) 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.

Instructions

(b) How should Evans account for this lease at its inception and determine the amount to be recorded?

Evans should account for this lease at its inception as an asset and an obligation.

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Step by Step Solution

Meaning of Lease

A lease is a legally binding contract between a lessor and a lessee. The lessee has been given the right to use certain property owned by the lessee for the period specified under this agreement. The lessee pays the lessee rent payments over the term of the lease in exchange for the use of the asset.

Explaining the treatment that Evans accounts for the lease.

Evans should account for this lease as an asset and an obligation at the start of the lease period in an amount equal to the present value of minimum lease payments during the lease term, except that portion of the payments that represents executory expenses, plus any profit thereon. If the sum so calculated exceeds the fair value of the leased equipment at the lease's beginning, the machine's fair value should be recorded as the asset and obligation.

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