Question

Option #1: Transactions for fund statements and government-wide statements

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.

Answer 1

Present value of lease payments - 3485000

Fair value of asset - 3700000

PV/ fair value - 94.2%

Since present value of lease payments is more than 90 percent of fair value of asset. Hence classification of lease as capital lease is correct.

Interest rate is 9.81% based on installment amount of 875000

Journal entries in capital project fund

At beginning of lease

Expenditure . Dr 700000

To cash. 700000

Expenditure. Dr 2785000

To warrants payable 2785000

Initial year end payment

Expenditure. Dr 273208

To warrants payable 273208

Warrants payable. Dr. 875000

To cash. 875000

Entries in debt service fund

Debt service fund - principal. Dr. 700000

Cash. 700000

At end of year

Debt service - principal. 601792

Debt service - interest. 273208

To cash. 875000

Entries in government activity journal

Leased building. 3485000

To cash. 700000

To lease liability 2785000

At end of year

Lease interest. Dr 273208

To lease liability. 273208

Lease liability. Dr. 875000

To cash. 875000

Financial statement prepared in government wide statements Is Statement of net assets to show assets and liabilities

Amount shown in liability section is 2183208

Financial statements prepared in fund statements is government fund balance sheet to show assets and liabilities.