Question: On July 1, 2011, a five-year agreement is signed between the City of Genoa and the Computer Leasing Corporation for the use of computer equipment not associated with proprietary funds activity. The cost of the lease, excluding executory costs, is $12,000 per year. The first payment is to be made by a capital projects fund at the inception of the lease. Subsequent payments, beginning July 1, 2012, are to be made by a debt service fund. The present value of the lease payments, including the first payment, is $54,552. The interest rate implicit in the lease is 5 percent.
a. Assuming the agreement meets the criteria for a capital lease under the provisions of SFAS No. 13, make the entries required in
(1) the capital projects fund and
(2) the debt service fund on July 1, 2011, and July 1, 2012.
b. Comment on where the fixed asset and long-term liability associated with this capital lease would be recorded and the impact of the journal entries recorded for a.