A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The asset will be returned to the lessor at the end of the lease. The present value of the lease is $20,000, and annual payments of $5,411.41 are payable beginning on the date the lease is signed. The interest portion of the second payment is $1,604.75. The equipment is to be used in City Hall and was purchased from appropriated funds of the General Fund. What entry should be made for the government-wide financial statements one year from the date the lease is signed?

Question

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One year after signing the lease, the journal entry to record the lease payments and the amortization of the leased asset would be:

Debit: Lease payable - $4,191.41 ($5,411.41 - $1,220 in interest)
Debit: Interest expense - $1,604.75
Debit: Depreciation expense - $2,000 ($20,000 / 10 years)
Credit: Cash - $5,411.41

Option A is incorrect because it does not account for the interest expense or the depreciation expense.
Option C is incorrect because it records the full lease payment as an expense instead of separating the interest and principal portions.
Option D is incorrect because it records the full lease payment as an asset instead of separating the interest and principal portions.
Option E is incorrect because it records the full lease payment as an expense instead of separating the interest and principal portions.

A Five-Year Lease Is Signed by the City of Wachovia