Question

In: Accounting

At the beginning of the year, Robinson County acquired a new storage building under a capital...

At the beginning of the year, Robinson County acquired a new storage building under a capital lease agreement.

An initial payment of $700,000 is made to start the lease with four subsequent payments for the same amount at the end of each year starting in late 20X7.

The total lease payment amount for the duration of the lease is $3,500,000.

The present value of the lease at the inception is $3,485,000, including the initial payment. The county borrowed the funds for four years at an annual interest rate of 7%.

At the creation of the lease, the building’s fair value is $3,700,000.

Required:

Evaluate the classification of the building as a capital lease. Discuss if this is the proper classification and how you concluded on this classification.

Prepare the journal entries in the capital projects fund, the debt service fund, and the governmental activities journal for the beginning of the lease.

Prepare the journal entries in the debt service fund and governmental activities journal for the end of the initial year payment.

At the end of the initial year, what financial statement(s) would be prepared to show the assets and the liabilities pertaining to the capital lease? What is the total that would be reported in the liability section of this financial statement?

Paper Requirements:

Submit your responses to the questions in a 3-5-page Microsoft Word document. Label each question clearly. Include computations in a table and show work.

For written answers, ensure your responses are well-written.

Solutions

Expert Solution

In Capital lease the ownership transfers to the lessee at the end of the lease period. The lease term encompasses 75% of its useful life. The present value of minimum lease payments required under the lease is atleast 90% of its fair value of the asset at the inception of the lease. In the given case, the building is acquired for storage purpose and it is assumed that it has been acquired for long period of time, so we can conclude that it is a capital lease.

Journal Entries for the beginning of the lease

Journal Entry Debit Credit

At Inception : Gross Asset $34,85,000

Lease Liability $34,85,000

(Building recorded in the books)

Lease Rental Expense $700,000

Cash / Bank   $700,000

(Initial Payment made at the start of the lease.)

Journal Entries for the end of the lease

Depreciation entry will also be recorded at the year end

Lease Rental Entry : Lease Rental Expense

Interest Expense

Cash / Bank

At the end of the initial year, the building will be shown as a fixed asset in the financial statement,the liability will also been shown in the books, depreciation will be charged to the profit and loss account. Apportion lease payments into finance charge.

ekkarill92 answered 2 years ago
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