Question

The City of Clear Lake signed a lease agreement with Mountainside Builders whereby Mountainside will construct a new office building for city administrative use and lease it to the City for 30 years. The fair market value of the building is $12 million. The City has agreed to make an initial payment of $822,441 and annual payments in the same amount for the next 29 years. (This assumes a 6 percent discount rate.) The lease includes a funding clause, which allows Clear Lake to terminate the lease agreement if the government does not appropriate funds for the lease payments. Clear Lake does not intend to exercise this option unless there is a financial emergency. Upon completion, the building had an appraised value of $13 million and an estimated useful life of 40 years.
Required:
Provide 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.

Answer 1

Try making discount to 5% they will have to pay just a little more for what they are buying. Try moving the payment to 822,000 so you can save the 441 dollars.