Question

How should a lease for a general capital asset be recorded in the General Fund accounts at the inception of the lease?

1) Debit to a lease asset account.
2) Debit to a capital expenditure account.
3) Credit to Lease Obligations Payable.
4) Both Debit to a lease asset account and Credit to Lease Obligations Payable are correct.

Answer 1

In the General Fund accounts at the inception of a lease, a capital lease is recorded as a Debit to a Lease Asset Account and a Credit to Lease Obligations Payable, while an operating lease is a Debit to a capital expenditure account.

The correct answer is 4)

Step-by-step explanation:

When recording a lease for a general capital asset in the General Fund accounts at the inception of the lease, it should typically be recorded in the following manner:

1. Debit an asset account (Lease Asset Account) if the lease qualifies as a capital lease under the relevant accounting standards. This would be recognized as a capital lease if it transfers substantially all the benefits and risks of ownership to the lessee.
2. A corresponding Credit to Lease Obligations Payable is required, representing the liability for future lease payments.

For governmental funds using modified accrual accounting, such as the General Fund, the lease would be recorded as a debit to a capital expenditure account if the lease is an operating lease or doesn't meet the threshold of a capital lease.

Therefore, the correct answer would be 4) Both Debit to a lease asset account and Credit to Lease Obligations Payable are correct, only if the lease is a capital lease. For an operating lease, it would be a Debit to a capital expenditure account.