Capital Assets Acquired under Lease Agreements. Crystal City signed a lease agreement with East Coast Builders, Inc., under which East Coast will construct a new office building for the city at a cost of $12 million and lease it to the city for 30 years. The city agrees to make an initial payment of $847,637 and annual payments in the same amount for the next 29 years. An assumed borrowing rate of 6 percent was used in calculating lease payments. Upon completion, the building had an appraised market value of $13 million and an estimated life of 40 years.
Required
a. Using the criteria presented in this chapter, determine whether Crystal City should consider this lease agreement a capital lease. Explain your decision.
b. Provide the journal entries Crystal 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.