Capital leases create both assets and liabilities.

Pearl City leases an emergency communications system. The term of the lease is 10 years, approximately the useful life of the equipment. Based on a sales price of $800,000 and an interest rate of 6 percent, the city agrees to make annual payments of $108,694. Upon the expiration of the lease the equipment will revert to the city.

1. Prepare an appropriate entry in the citys government-wide statements to reflect the signing of the lease. 2. Prepare appropriate entries to record the first payment on the lease. The city charges depreciation using the straight-line method. 3. Will your entries to record the final payment on the lease be the same as the first? Explain. 4. Comment briefly on how the lease transactions would be recorded in the citys general fund or other appropriate governmental fund.