Scenario B: Capital Assets Acquired Under Lease Agreements

Tangerine County needs a new county court house but does not have current funding available. Accordingly, the county entered into a lease agreement with Surf City Builders whereby the Builders would construct a new court house and lease it to the county for 30 years. The fair market value of the building is $15 million. Using a 6% interest rate, the county has agreed to make an initial payment of $1,028,050 and annual payments in the same amount at the beginning of each of the remaining 29 years. The lease includes a funding clause, which allows Tangerine County to terminate the lease agreement if the government does not appropriate funds for the lease payments, but the county does not intend to exercise the option unless there is a financial emergency. Upon completion, the building had an appraised value of $17 million and a 40-year useful life.

Required:

• Provide the journal entries the county should make in both the Capital Projects Fund general journal and the Governmental Activities general journal to record the lease at the date of inception.
• Which financial statement(s) prepared at the end of the first year would show both the assets and the liability related to this capital lease?
• Prepare journal entries in an Excel spreadsheet.