On July 1, 2005, the City of Arlette, which records depreciation on plant assets in the voluntarily maintained General Capital Assets Account Group, leased under a three-year term capital lease a computer with a four-year economic life and no residual value. Lease payments of $3,000 were payable by the General Fund on July 1, 2005, 2006, and 2007; a bargain purchase option of $500 was payable on June 30, 2008. The interest rate implicit in the lease, 9%, was less than the city’s incremental borrowing rate and was known to the City Council.
Prepare journal entries with respect to the capital lease for the City of Arlette for the three fiscal years ended June 30, 2008, in all affected funds and account groups. Identify the affected funds or account groups. The City of Arlette depreciates plant assets by the straightline method.
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