Crystal City signed a lease agreement with East Coast Builders under which East Coast will construct a new office building for Crystal City at a cost of $11 million and lease it to Crystal City for 30 years. Crystal City agrees to make an initial payment $860,000 and annual payments in the same amount for the next 29 years. An assumed borrowing rate of 6% was used in calculating the lease payments. Upon completion, the building had an appraised market value of $13.5 million and estimated life of 40 years. The present value factor of an annuity for 29 periods at 6% is 13.590721.

1. The present value of all 30 lease payments is:
2. 11,519,998
3. 11,688,020
4. 12,548,020
5. 25,800,000

1. This lease is a(n):
2. Operating lease because the present value of the minimum lease payments exceeds 90% of the assets fair value.
3. Capital lease because the present value of the minimum lease payments exceeds 90% of the assets fair value.
4. Operating lease because the present value of the lease payments is less than 90% of the assets fair value.
5. Capital lease because the present value of the lease payments is less than 90% of the assets fair value.

1. At the inception (i.e. beginning) of the lease, how much should be recorded as expenditures?
2. 860,000
3. 11,519,998
4. 11,688,020
5. 12,548,020
6. 25,800,000

1. Provide the journal entry(ies) Crystal City should record in the capital projects fund at the date of inception.

1. How would your answer change if the building had an estimated life of 50 years and the propertys appraised market value was $15 million?