A general government department of the City of Perfater Falls leased specialized equipment under a multi-year, noncancelable lease agreement that qualifies as a capital lease. The lease required a down payment of $500,000 and the present value of the minimum lease payments (i.e., the capitalizable cost of the leased asset) was $5,000,000. The implicit rate of interest on the lease is 10%. Subsequent lease payments of $750,000 are required annually beginning in 20X2.
1. Record the inception of the lease, including the down payment in the General Fund of Perfater Falls. The lease was signed on March 1, 20X1.
2. Record any adjusting entries required at December 31, 20X1, the end of Perfater Falls fiscal year.
3. Record the February 28, 20X2, payment of $750,000 to the lessor per the lease agreement.