Capital Assets Acquired under Lease Agreements. Crystal City signed a lease agreement with East Coast Builders, Inc., under which East Coast will construct a new office building for the city at a cost of $12 million and lease it to the city for 30 years. The city agrees to make an initial payment of $847,637 and annual payments in the same amount for the next 29 years. An assumed borrowing rate of 6 percent was used in calculating lease payments. Upon completion, the building had an appraised market value of $13 million and an estimated life of 40 years.
Required
a. Using the criteria presented in this chapter, determine whether Crystal City should consider this lease agreement a capital lease. Explain your decision.
b. Provide the journal entries Crystal City should make for both the capital projects fund and governmental activities at the government wide level to record the lease at the date of inception.
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