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 government-wide financial statements, the appropriate entry 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 $53,333 and Prepaid lease $106,667; Credit Cash $40,000 and Other financing sources $120,000.
C) Debit Equipment $160,000; Credit Cash $40,000 and Lease payable $120,000.
D) Debit Expenditures $160,000; Credit Cash $40,000 and Lease payable $120,000.

Question

Quizplus · Accepted Answer

Since the lease qualifies as a capital lease, the city would record the bulldozer as an asset (Equipment) and the obligation to pay future lease payments as a liability (Lease payable). The total value of the lease is $160,000 ($40,000 initial payment + $40,000 per year for 3 years), which is the amount recorded for both the Equipment and the Lease payable.

Star City Leased a Bulldozer for Use in Activities Accounted