Capital Lease. The City of Jamestown has agreed to acquire a new city maintenance building under a capital lease agreement. At the inception of the lease, a payment of $100,000 is to be made: nine a

Capital Lease.

The City of Jamestown has agreed to acquire a new city maintenance building under a capital lease agreement. At the inception of the lease, a payment of $100,000 is to be made: nine annual lease payments, each in the amount of $100,000 are to be made at the end of each year after the inception of the lease. The total amount to be paid under this lease, therefore, is $1,000,000. The town could borrow this amount for nine years at the annual rate of 8 percent: therefore, the present value of the lease at inception, including the initial payment is $724,689. Assume that the fair value of the building at the inception of the lease is $750,000.

a. Show the entry that should be made in a capital projects fund at the inception of the lease after the initial payment has been made.

b. Show the entry that should be made at the inception of the lease in the government activities journal.

c. Show the entry that should be made in the debt service fund and governmental activities journal to record the second lease payment.

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