Buy here : http :// homework . plus / e5-19-capital-assets /
Buy here : http :// homework . plus / e5-19-capital-assets /
E5-19 – Capital Assets
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 $ 1,000,000 and annual payments of $ 809,375 for the next 29 years . Using an assumed borrowing rate of 6 percent , the present value of the lease payments is approximately $ 12,000,000 . 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
1 . a . Using the criteria presented in this chapter , determine whether the city should consider this lease agreement a capital lease . Explain your decision .
I would suggest that Rochester use a capital lease in this scenario . Looking at the figures , we see a 95 % of the fair value ( exceeding the 90 % of the fair value ). Also the lease agreement has around 75 % of estimated useful life on the building .
1 . b . Provide the 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 .
1 . 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 ?