Question

7.

A city’s capital projects fund engages in a lease for three police cars from a local car dealership. Payments are $40,000 per year for 5 years. The implicit rate of interest is 10% and a $5,000 down payment is made. The present value of the lease is $150,000. At the end of the lease, ownership transfers to the city.

Prepare the journal entries at the inception of the lease and for the first year’s payment. Funding is provided by GF transfers to a DSF. Payments are made by the DSF. Identify in which fund(s) your JE’s are recorded. Entries for the GF transfers are not required.

Answer 1

Journal Entries at the inception of lease:

Local car Dealer Account Dr.     $5000

To Cash/Bank                                       $5000

(Being Down payment for three Police cars have been made)

Note: As this is a Hire Purchase Transaction i.e. though ownership transfers on payment of last instalment, treated par with Finance lease.

So, Ownership is accounted for herewith.

Police Cars Account Dr. $150000

To Local Car Dealer Account       $150000

(Being Purchase of Three Cars on hire purchase)

First Year Payment:

Local Car Dealer Account Dr.    $40000

To Cash /Bank Account                         $40000

(Being repayment of the first instalment)

Comment: What is DSF ? I dont understand