3.2On January 1, Year 8, Von Company entered into two noncancellable leases of new machines for use in its manufacturing operations. The first lease does not contain a bargain purchase option and the lease term is equal to 80% of the estimated economic life of the machine. The second lease contains a bargain purchase option and the lease term is equal to 50% of the estimated economic life of the machine. Required:

a. Explain the justification for requiring lessees to capitalize certain long-term leases. Do not limit your discussion to the specific criteria for classifying a lease as a capital lease.

b. Describe how a lessee accounts for a capital lease at inception.

c. Explain how a lessee records each minimum lease payment for a capital lease.

d. Explain how Von should classify each of the two leases. Provide justification.

3.6

Nearly all companies confront loss contingencies of various forms. Required:

a. Describe what conditions must be met for a loss contingency to be accrued with a charge to income.

b. Explain when disclosure is required, and what disclosures are necessary, for a loss contingency that does not meet the criteria for accrual of a charge to income.

3.9

Ownership interests in a corporation are reported both in the balance sheet under shareholders equity and in the statement of shareholders equity. Required:

a. List the principal transactions and events reducing the amount of retained earnings. (Do not include appropri- ations of retained earnings.)

b. The shareholders equity section of the balance sheet makes a distinction between contributed capital and retained earnings. Discuss why this distinction is important.

c. There is frequently a difference between the purchase price and sale price of treasury stock. Yet practitioners agree that a corporations purchase or sale of its own stock cannot result in a profit or loss to the corporation. Explain why corporations do not recognize the difference between the purchase and sale price of treasury stock as a profit or loss.