I don't understand this question at all…The extra 10,000 is throwing me off. Anyone understand this?
The County of Mills signs a lease on December 31, Year One for a small airplane to be used when officials need to inspect the region. Payments are $10,000 per year for eight years (the entire life of the airplane) with the first payment made immediately. The present value of these payments is $58,680 at a reasonable interest rate of 10 percent. Payments are being made from the general fund. Fund-based financial statements are being prepared at the end of Year One. Which of the following statements is true?
A An expenditure of $10,000 is reported.
B An expenditure of $58,680 and an other financing source of $58,680 are both reported.
C An expenditure of $58,680 and an other financing source of $68,680 are both reported.
D An expenditure of $68,680 and an other financing source of $58,680 are both reported.
Ans is D
This is a capital lease because the life of the lease is 75 percent or more of the life of the asset. For the fund-based financial statements of the governmental funds, when the lease is first signed, the accountant assumes that the government could have borrowed in the $58,680 on a long-term liability (an other financing source) and used it to buy the airplane (an expenditure). The $10,000 payment is the equivalent of paying off a long-term liability (and is also an expenditure). Therefore, the reporting should parallel that alternative: the expenditure is $68,680 ($58,680 plus $10,000) and the other financing source is $58,680.
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