The City of Jamestown has agreed to acquire a new city maintenance building under a capital lease agreement. At the inception of the lease, a payment of $100,000 is to be made; nine anual lease payments, each in the amount of $100,000, are to be made at the end of each year after the inception of the lease. The total amount to be paid under this lease, therefore, is $1,000,000. The town could borrow this amount for nine years at the annual rate of 8 percent; therefore, the present value of the lease at inception, including the initial payment, is $724,689. Assume that the fair value of the building at the inception of the lease is $750,000.
a. Show the entry that should be made in a capital projects fund at the inception of the lease after the initial payment has been made.
b. Show the entry that should be made at the inception of the lease in the government activities journal.
c. Show the entry that should be made in the debt service fund and governmental activities journal to record the second lease payment.
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a. Entry in capital projects fund at the inception of the lease after the initial payment has been made:
Capital Projects Fund:
Debit - Buildings under Capital Lease $750,000
Credit - Capital Lease Obligation $750,000
b. Entry at the inception of the lease in the government activities journal:
Government Activities Journal:
Debit - Buildings under Capital Lease $750,000
Credit - Capital Lease Obligation $724,689
Credit - Cash $100,000
c. Entry in the debt service fund and governmental activities journal to record the second lease payment:
Debt Service Fund:
Debit - Expenditures $100,000
Credit - Cash $100,000
Government Activities Journal:
Debit - Interest Expense $57,960 ([$724,689 - $100,000] * 8%)
Debit - Capital Lease Obligation $42,040 ([Difference in cash payment and interest expense] $100,000 - $57,960)
Credit - Cash $100,000
a. The entry that should be made in a capital projects fund at the inception of the lease, after the initial payment has been made, would be:
Capital Projects Fund:
Debit - Building under capital lease (Asset account) for $750,000
Debit - Lease payable (Liability account) for $250,000 (Total lease amount - Initial payment)
Credit - Other financing sources (Revenue account) for $1,000,000 (Total lease amount)
Credit - Cash (Asset account) for $100,000 (Initial payment)
b. The entry that should be made at the inception of the lease in the government activities journal would be:
Government Activities:
Debit - Building under capital lease (Asset account) for $750,000
Debit - Lease payable (Liability account) for $250,000 (Total lease amount - Initial payment)
Credit - Other financing sources (Revenue account) for $1,000,000 (Total lease amount)
Credit - Cash (Asset account) for $100,000 (Initial payment)
c. The entry that should be made in the debt service fund and governmental activities journal to record the second lease payment would be:
Debt Service Fund:
Debit - Expenditures - Lease payments (Expense account) for $100,000
Credit - Cash (Asset account) for $100,000
Government Activities:
Debit - Expenditures - Lease payments (Expense account) for $100,000
Credit - Cash (Asset account) for $100,000