In early 2017, McCormick County agreed to acquire a new recreatioin equipment st
ID: 2566424 • Letter: I
Question
In early 2017, McCormick County agreed to acquire a new recreatioin equipment storage facility under a capital lease agreement. At the inception of the lease, a payment of $480,000 is made; four additional annual lease payments, each in the amount of $480,000, are to be made at the end of each year, beginning in late 2017. The total amount to be paid under this lease is $2,400,000. The county could borrow this amount for four years at an annual interest rate of 8%. Therefore, the present value of the lease at inception, including the initial payment is $2,069,820. Assume that the fiar value of the building at the inception of the lease is $2,280,000.
a.1, Was this lease property classified as a capital lease? yes or no
a.d. Complete the following criteria in relatin to decision making. Do not round intermediate calculations. Round your answers to nearest whole percent.
Present value of minimum lease payment as a percedntage of fair value of building _________%.
b. Prepare the entries required to record the inception of the lease in the capital projects fund, the debt service fund and the governmental activities journal. (If no entry is required, please note)
1. Record the inception of the lease Debt Credit
Captial Projects Fund:
Debt Service Fund:
Governmental Activities:
c. Prepare the entries required to record the payment at the end of the first year of the lease in both the debt service fund and governmenta activities journal. (If no entry is required, note)
1. Record the payment at the end of the year.
1. Debt Service Fund
Governmental Activities
d.1. Which financial statement(s) prepared at the end of the first year would show both the asset and the liability related to this capital lease?
Government wide statements of comprehensive income
Government wide statements of net position
Government wide statements of profit or loss
Government wide satements of revenue and expenditure
d.2. What amoutn would the liability be reported? $_____.
Explanation / Answer
A.
Yes the lease was properly classified as a capital lease. This is because the present value of the minimum lease payments is more than 90% of the equipment’s fair value.
$2069820/$2280000*100=90.78%
B.
Capital projects fund
Dr. Expenditure A/c
$2069820
Cr. Other financing sources-capital lease agreement
$2069820
Governmental activities
Dr. Expenditure A/c
$2069820
Cr. Capital lease payable A/c
$2069820
Debt service fund
No Entry
C.
Debt service fund
Dr. Expenditures-Interest payment A/c
$165585.6
Dr. Expenditures-Principal payment A/c
$314414.6
Cr. Cash A/c
$480000
Governmental activities
Dr. Expenses-Interest on capital lease A/c
$165585.6
Dr. Capital lease payable A/c
$314414.6
Cr. Cash A/c
$480000
D.
The statement of net assets would show the balance for the asset and liability created by the capital lease.
The liability will be recorded at $1755405.4 i.e. ($2069820-$314414.6)
Capital projects fund
Dr. Expenditure A/c
$2069820
Cr. Other financing sources-capital lease agreement
$2069820
Governmental activities
Dr. Expenditure A/c
$2069820
Cr. Capital lease payable A/c
$2069820
Debt service fund
No Entry