On July 1, 2013, Alameda County leased equipment, agreeing to pay $400,000 at the start of the lease, and make five annual payments of $400,000 per year on June 30 of each subsequent year. The lease carries an interest rate of 4%. The county's fiscal year ends June 30, and the equipment is reported in the general fund.
Required
a. Assume the lease qualifies as a capital lease. Prepare the entries to record the lease agreement and payments on July 1, 2013, June 30, 2014, and June 30, 2015.
b. Assume the lease qualifies as an operating lease. Repeat the requirements in part a.
c. Comment on the difference in total expenditures recognized under the two lease accounting methods.