The City of Rochester signed a 30-year agreement with East Coast Real Estate, Inc. to lease a newly constructed building for city services. The city agrees to make an initial payment of $1,000,000 and annual payments of $809,375 for the next 29 years. Using an assumed borrowing rate of 6 percent, the present value of the lease payments is approximately $12,000,000. At the time the lease agreement is signed, 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 the city should consider this lease agreement a capital lease. Explain your decision.
b. Provide the journal entries the 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.
c. Which financial statement(s) prepared at the end of the first year would show both the asset and the liability related to this capital lease?