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). Prepare the journal entry/entries required for government-wide financial statements for this lease contract for 2020 and 2021.
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).
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