Question

On the last day of the year, Pine Village signed a 10-year lease and took possession of a building for its administrative offices. The lease meets the criteria of a capital lease. What effect will the transaction have on the total assets reported in the following statements?

General Fund Government-wide Statements
(Balance Sheet) (Statement of Net Assets)
a. Increase Increase
b. No effect Increase
c. Increase No effect
d. No effect No effect

Answer 1

On the General Fund balance sheet, there is No effect on total assets, as capital leases are not recorded under the modified accrual basis. On the government-wide Statement of Net Assets, there is an Increase in total assets due to the capital lease being recorded as a capital asset under the accrual basis.

Step-by-step explanation:

When Pine Village signs a 10-year lease for a building that is classified as a capital lease, the transaction will have different effects on the General Fund balance sheet and the government-wide Statement of Net Assets.

For the General Fund balance sheet, under the modified accrual basis of accounting, capital leases are not recorded as capital assets. Therefore, there will be No effect on total assets in the General Fund statements.

In contrast, the government-wide financial statements, which are presented using the accrual basis of accounting, require that the leased asset and corresponding liability be recorded at the inception of the lease. As a result, there will be an Increase in the total assets reported on the government-wide Statement of Net Assets due to the addition of the leased building as a capital asset.

Therefore, the correct answer to the student's question is option b. No effect Increase.