Question - In early 2017, McCormick County agreed to acquire a new recreation equipment storage facility under a capital lease agreement. At the inception of the lease, a payment of $750,000 will be made; four additional annual lease payments, each in the amount of $750,000, are to be made at the end of each year, beginning in late 2017. The total amount to be paid under this lease is $3,750,000. The county could borrow this amount for four years at an annual interest rate of 6 percent. Therefore, the present value of the lease at inception, including the initial payment, is $3,348,829. Assume that the fair value of the building at the inception of the lease is $3,600,000.
Required
a. Was this lease properly classified as a capital lease? Explain.
b. Show the entries required to record the inception of the lease in the capital projects fund, the debt service fund, and the governmental activities journal.
c. Show the entries required to record the payment at the end of the first year of the lease in both the debt service fund and governmental activities journal.
d. 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? At what amount would the liability be reported?