InstructionsOn 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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Answered: On January 1, 2020, Evans Company…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Instructions

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?

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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