Question

The City of Rochester signed a 30-year agreement with East Coast Real Estate, Inc. to lease a newly-constructed building for city services. The city agrees to make an initial payment of $1,600,000 and annual payments of $755,260 for the next 29 years. Using an assumed borrowing rate of 6 percent, the present value of the lease payments is approximately $11,864,600. At the time the lease agreement is signed, the building had an appraised market value of $13 million and an estimated life of 40 years.

Required

a-1.

Should the city consider this agreement a capital lease?

	Yes
	No

a-2.	Complete the following criteria's in relation to decision making. (Do not round intermediate calculations. Round your answers to 1 decimal place.) 1.Present value of minimum lease payment as a percentage of fair value of building % 2.Lease term as a percentage of estimated useful life of building%

          

b.

Provide journal entries the city should make for both the capital projects fund and governmental activities at the government-wide level to record the lease at the date of inception. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Transaction	Fund	General Journal	Debit	Credit
1. Record the lease at the date of inception.
1	Capital Projects Fund
	Governmental Activities

         

c.

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 statements of revenue and expenditure

Answer 1

There are four criterias and if any of them is satisfied then it can be considered as capital lease
1)If the lease term is equal to or greather 75% of life of the asset
=40*75%=30 years and it matches the principle above so it is capital lease
a1)Yes
a2)Present vlaue of lease payments= 1600000+pv(6%,29,755260,0,0)=11864528
This is =11864528/(13*10^6)=91.27%
lease te=30/40=75%

b)capital project fund:
expenditure(db)11864528
cash(cr)1600000
capital lease(cr)10264528

government activites:
Buildings(db)11864528
cash(cr)1600000
capital lease payable(Cr)10264528

c)Government wide statements of net position