Final answer:
Sunny City's journal entry for an annual lease payment in the debt service fund includes a debit to Lease Liability and a credit to Cash, decreasing liabilities and cash balances.
Step-by-step explanation:
When Sunny City makes its annual lease payment for an unpaid lease obligation, the general journal entry in the debt service fund will reflect a decrease in liabilities and a reduction in cash or other financial resources used to service the debt. A typical journal entry records the debit to the lease liability account and a credit to the cash account.
Example Journal Entry:
Debit: Lease Liability
Credit: Cash
This entry is in accordance with government accounting and financial reporting standards specifically relating to debt service transactions.