A government signed a five-year capital lease on January 1, 2009 to obtain some equipment. The lease provided that the government would make a down payment of $10,000 and four $10,000 payments each year after that, beginning January 1, 2009. The government has a fiscal year ending December 31. Upon inception of the lease, the government, in its governmental fund accounting records would:

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The government would debit expenditures for the present value of the payments (including the $10,000), credit cash for $10,000 and credit other financing sources for the difference between the $10,000 and the present value of the future payments. This is because the lease is a capital lease, which means that the government has assumed the risks and rewards of ownership of the equipment. As a result, the government must record the asset and the related liability on its balance sheet. The present value of the payments is the amount that the government would have to pay today to settle the obligation under the lease. The difference between the $10,000 down payment and the present value of the future payments is the amount that the government must borrow to finance the lease.

A Government Signed a Five-Year Capital Lease on January 1