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On January 1, 2006, Von Company
entered into two noncancelable leases for new machines to be used in its
manufacturing operations. The first lease does not contain a bargain purchase
option; the lease term is equal to 80 percent of the estimated economic life of
the machine. The second lease contains a bargain purchase option; the lease
term is equal to 50 percent of the estimated economic life of the machine.
How should Von classify each of
the two leases? Why?
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