Question

The City of Clear Lake signed a lease agreement with Mountainside Builders whereby Mountainside will construct a new office building for city administrative use and lease it to the City for 30 years. The fair market value of the building is $12 million. The City has agreed to make an initial payment of $822,441 and annual payments in the same amount for the next 29 years. (This assumes a 6 percent discount rate.) The lease includes a funding clause, which allows Clear Lake to terminate the lease agreement if the government does not appropriate funds for the lease payments. Clear Lake does not intend to exercise this option unless there is a financial emergency. Upon completion, the building had an appraised value of $13 million and an estimated useful life of 40 years.

Required

1. 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. Enter your answers in whole dollars, not in millions.

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

2. 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

I credit | Answers a) Journal entries' Date particulars Debit i Expenditure Alc dr $12,000,000 $822,441 To cash To other financial source 411,177,559 capital Lease Agreement Being to record capital lease and down payment) Buildings Ale dr $12000000 $ 892,441 to cash To Capital lease obligations payable $11,177,559 (Being to record capital lease and lease payments payable) Which finalcial statements prepared at the end Government wide statements of net position Hence, option (b) is correct answer