On December 31, 2020, the City of Oliver leases a large piece of construction equipment with a 25-year life for five years to use during a construction project. After the contract ends, the city must return the equipment to the lessor but has not guaranteed any residual value. The lease requires five annual payments of $40,000 per year beginning immediately. Oliver uses its own incremental borrowing rate of 10 percent per year because it does not know the implicit interest rate the lessor is charging. The present value of a $40,000 annuity due for five years at an annual interest rate of 10 percent is $166,795 (rounded).

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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On December 31, 2020, the City of Oliver leases a large piece of construction equipment with a 25-year life for five
years to use during a construction project. After the contract ends, the city must return the equipment to the lessor but
has not guaranteed any residual value. The lease requires five annual payments of $40,000 per year beginning
immediately. Oliver uses its own incremental borrowing rate of 10 percent per year because it does not know the
implicit interest rate the lessor is charging. The present value of a $40,000O annuity due for five years at an annual
interest rate of 10 percent is $166,795 (rounded).
Prepare the journal entry/entries required for government-wide financial statements for this lease contract for 2020 and
2021.
Transcribed Image Text:On December 31, 2020, the City of Oliver leases a large piece of construction equipment with a 25-year life for five years to use during a construction project. After the contract ends, the city must return the equipment to the lessor but has not guaranteed any residual value. The lease requires five annual payments of $40,000 per year beginning immediately. Oliver uses its own incremental borrowing rate of 10 percent per year because it does not know the implicit interest rate the lessor is charging. The present value of a $40,000O annuity due for five years at an annual interest rate of 10 percent is $166,795 (rounded). Prepare the journal entry/entries required for government-wide financial statements for this lease contract for 2020 and 2021.
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