At the beginning of the year, Robinson County acquired a new storage building under a capital lease agreement.

An initial payment of $700,000 is made to start the lease with four subsequent payments for the same amount at the end of each year starting in late 20X7.

The total lease payment amount for the duration of the lease is $3,500,000.

The present value of the lease at the inception is $3,485,000, including the initial payment. The county borrowed the funds for four years at an annual interest rate of 7%.

At the creation of the lease, the buildings fair value is $3,700,000.

Required:

Evaluate the classification of the building as a capital lease. Discuss if this is the proper classification and how you concluded on this classification.

Prepare the journal entries in the capital projects fund, the debt service fund, and the governmental activities journal for the beginning of the lease.

Prepare the journal entries in the debt service fund and governmental activities journal for the end of the initial year payment.

At the end of the initial year, what financial statement(s) would be prepared to show the assets and the liabilities pertaining to the capital lease? What is the total that would be reported in the liability section of this financial statement?

Paper Requirements:

Submit your responses to the questions in a 3-5-page Microsoft Word document. Label each question clearly. Include computations in a table and show work.

For written answers, ensure your responses are well-written.