Star City leased a bulldozer for use in activities accounted for in the general fund. The city paid $40,000 and agreed to pay $40,000 per year for 3 years. The bulldozer has a useful life of six years. The lease qualified as a capital lease. Assuming that the city maintains is books and records in a manner that facilitates the preparation of the fund financial statements, the appropriate entry in the general fund at the date of acquisition would be
A) Debit Expenditures $160,000; Credit Cash $40,000 and Other financing sources $120,000.
B) Debit Expenditures $40,000 and Prepaid lease $120,000; Credit Cash $40,000 and Other financing sources $120,000.
C) Debit Equipment $160,000; Credit Cash $40,000 and Other financing sources $120,000.
D) Debit Expenditures $160,000; Credit Cash $40,000 and Lease payable $120,000.

Question

Quizplus · Accepted Answer

In governmental accounting, when a capital lease is recorded in the general fund, the entire amount of the lease is recognized as an expenditure at the time of acquisition. The entry debits Expenditures for the total amount of the lease payments ($160,000) and credits Cash for the initial payment ($40,000). The remaining amount is recognized as Other financing sources ($120,000) to indicate future financing obligations under the lease. This approach reflects the use of current financial resources in the general fund.

Star City Leased a Bulldozer for Use in Activities Accounted