Question

The City of Leonard decides to lease school desks for its school system rather than buy them because the lessor will do all scheduled maintenance. On January 1, 2020, the school system leases 5,000 school desks for four years. After that, they will be returned to the manufacturer. Payment will be $20 per desk per year with payments on January 1, beginning on January 1, 2020. The city does not know how the lessor determined the annual charge. The city has an annual incremental borrowing rate of 8 percent. The present value of an annuity due of $1 at an 8 percent annual rate for four periods is 3.5771.

1. Make the journal entries for the City of Leonard for 2020 and 2021 in preparing government-wide financial statements.
2. Make the journal entries for the City of Leonard for 2020 and 2021 in preparing fund financial statements for its governmental funds.

Answer 1

a.

GOVERNMENT-WIDE FINANCIAL STATEMENTS

Accounted for within the General Fund (within the Governmental Activities)

January 1, 2020

Right-of-Use Assets ($100,000 x 3.5771) 357,710

Lease Liability 357,710

Lease Liability 100,000

Cash 100,000

December 31, 2020

Amortization Expense ($357,710/4 years) 89,428

Right-of-Use Asset 89,428

Interest Expense ($257,710 x 8 percent) 20,617

Lease Liability 20,617

January 1, 2021

Lease Liability 100,000

Cash 100,000

December 31, 2021

Amortization Expense ($357,710/4 years) 89,428

Right-of-Use Asset 89,428

Interest Expense ($257,710 plus $20,617

less $100,000 x 8 percent) 14,266

Lease Liability 14,266

b.

FUND FINANCIAL STATEMENTS

Accounted for within the General Fund

January 1, 2020

Expenditures – Lease Contract 357,710

Other Financing Sources – Lease Contract 357,710

January 1, 2020

Expenditures – Leased School Desks 100,000

Cash 100,000

  

January 1, 2021

Expenditures – Leased School Desks 100,000

Cash 100,000