1

LEASES

March 8, 2001 

Lease case study is divided into two sections:

Part I: Capital Lease

Illustrations showing a capital lease with another federal entity were excluded from the capital

lease case study due to a small number of agencies that reported these types of lease agreements of

which the lease is set to expire shortly.

Part II: Operating Lease
2
3

March 7, 2001

Part I. CAPITAL LEASES

The case study illustrates basic lease transactions with a non-federal entity in a general fund appropriation. 

This case study does not include all situations, including lease purchases. 
1

 Intermediate Accounting, Smith and Skousen, 11th edition, pgs 798, 804 states that “Only the noncancellable lease are subject

to capitalization”. The page 804 from the same reference illustrates a transaction where the title of the lease transfers to the lessee but

because it has a cancellation clause, the lease is classified as a rental agreement . A lease that has a cancellation clause, unless the

likelihood of cancellation is remote, is classified as an operating lease, even though it may meet other capital lease criteria. ” In addition,

Financial Accounting Standard # 98 defines a lease term as “fixed noncancellable term of the lease . . . . . . . A lease that is cancellable a)

only upon the occurrence of some remote contingency, b) only with the permission of the lessor, c) only if the lessee enters into a new

lease with the same lessor, or d) only if the lessee incurs a penalty in such amount that continuation of the lease appears, at inception,

reasonably assured shall be considered ‘noncancellable’ for the purpose of this definition.

4

PROPRIETARY REQUIREMENTS FOR CAPITAL LEASES - FASAB STANDARD #5

The FASAB liability standard defines capital leases as “leases that transfer substantially all the benefits and risks of ownership to the

lessee. If at its inception, a lease meets one or more of the following four criteria, the lease should be classified as a capital lease by the

lessee”:

1) The lease transfers ownership of the property to the lessee by the end of the lease term.

2) The lease contains an option to purchase the leased property at a bargain price.

3) The lease term is equal to or greater than 75% of the estimated economic life of the leased property. 

4) The present value of rental and other minium lease payments, excluding that portion of the payments representing executory

cost, equals or exceeds 90% of the fair value of the leased property. 

The FASAB standards do not address the cancellation clause on leases. But, FASB Technical Bulletin (FTB) #79-10, paragraph 5,

address cancellation of leases based on the availability of fiscal funding that are frequently found in leases of government units. The

fiscal funding clause permits cancellation of a lease by a governmental unit if the necessary governmental appropriations are not made for

the lease. If the likelihood of exercise of the fiscal funding clause is assessed as being remote, a lease agreement containing such a clause

would be considered a noncancelable lease; otherwise, the lease would be considered cancelable and thus classified as an operating

lease. A capital lease with cancellation clause1 that is likely to be exercised is classified as an operating lease. 
5

BUDGETARY REQUIREMENTS FOR CAPITAL LEASES - OMB CIRCULAR A-11

OMB circular A-11, Section 33.4 and Appendices A and B give federal agencies guidance on budgetary and scorekeeping requirements

on leases. The requirements state that “For lease purchases and leases of capital assets, you must have sufficient budgetary resources upfront to cover the present value of the lease payments discounted using Treasury interest rates.” These requirements are intended as a

requirements for those agencies that have a lease with nonfederal entity. The focus of the scorekeeping rule is to ensure that agencies

have sufficient budgetary resources when the capital asset is acquired. OMB’s intention is to have the scorekeeping rules apply only

once in the capital asset acquisition process, when the asset is acquired from a nonfederal entity. Therefore, upfront funding

requirements do not apply to the lease arrangements between federal agencies. 

OMB Criteria for operating lease. The operating lease has to meet all the criteria listed below. If the criteria are not met, the lease will

be considered to be a capital lease or a lease-purchase, as appropriate.

1) Ownership of the asset remains with the lessor during the term of the lease and is not transferred to the Government at or

shortly after the end of the lease term.

2) The lease does not contain bargain purchase option.

3) The lease term does not exceed 75% of the estimated economic life of the asset.

4) The present value of the minimum lease payments over the life of the lease does not exceed 90% of the fair market value of the

asset at the beginning of the lease term.

5) The asset is a general purpose asset rather than being for a special purpose of the Government and is not built to the unique

specification of the Government as lessee. 

6) There is a private sector market for the asset.

For the purpose of distinguishing operating lease, capital lease and lease purchases, OMB has provided a guidance on cancellation

clauses on OMB circular A11, Appendix B, pg 426.
2

 The depreciation period used to calculate depreciation expense depends on which of the capital lease criteria was used to

qualify the capital lease. If the lease qualified met ownership transfer or bargain purchase option, the estimated useful life of the asset

should be used. If the lease is qualified under economic life or investment recovery, and the lease term is shorter than the estimated

useful life of the asset, then the lease term should be used for depreciation purpose. Intermediate Accounting, Smith and Skousen, 11th

edition, pgs 806-807

6

Assume lease transactions are done in a multi year appropriated fund. The budgetary entries for capital leases are illustrated using the

current OMB guidance which requires up front budgetary resources to cover the PV of the lease payments (See current A11 for details).

Capital Lease

Equipment A with the useful life of 6 years was leased for 5 years. Assume there are no cancellation clause, executory costs, or property

tax involved with the lease. Treasury interest rate is 10.0%. Lease payments including interest are paid in the beginning of the year. 

FMV of the equipment is $120,000. The lease term met the economic life criteria of the capital lease, therefore, the depreciation will be

calculated using the lease term2.

1) Transfer of ownership NO

2) Bargain purchase option NO

3) Lease term is greater than or equal to 75% YES

4) PV of the lease payment is greater than or equal to 90% FMV of the property NO

Year Annual lease

Payment

Interest on the unpaid lease liability (10%) Reduction of Lease

liability

Lease liability

100,000

1 23,982 0 23,982 76,018

2 23,982 7,602 16,380 59,638

3 23,982 5,964 18,018 41,620
7

4 23,982 4,162 19,820 21,800

5 23,982 2,182 21,800 0

CAPITAL LEASE AGREEMENT BETWEEN A FEDERAL AGENCY AND A NON-FEDERAL

ENTITY

EVENT DESCRIPTION YR REF

CODE

CAPITAL LEASE

EQUIPMENT

1. Appropriation is received for the lease

payment. Interest accrued during the first year

is included in the appropriation.

1

A104

A104

A116

A120

Proprietary

1010 FBWT 107,602

3100 Unexpended auth 107,602

Budgetary

4119 Appropriation realized 107,602

4450 Unapportioned auth 107,602

4450 Unapportioned auth 107,602

4510 Apportionment 107,602

4510 Apportionment 107,602

4610 Allotment 107,602
3

 If agency has a capital lease agreement with another federal entity, capital lease liability maybe unfunded since the upfront

funding requirement is not required for capital lease agreement between federal agencies.

8

2. A lease contract was signed 1

B204

Proprietary

None

Budgetary

4610 Allotment 100,000

4801 Unexpended oblig - unpd 100,000

3. The agency acquired the equipment with a 

lease term of 5 years.

1

B302

B134

B302

Proprietary

1810 Assets Under Capital Lease 100,000

2940 Capital Lease Liability3 100,000

3100 Unexpended appropriation 100,000

5700 Appropriations used 100,000

Budgetary

4801 Unexpended oblig - unpd 100,000

4901 Expended auth - unpd 100,000

4. To record lease payment 1

B110

Proprietary

2940 Capital Lease Liability 23,982

1010 FBWT 23,982

Budgetary

4901 Expended auth - unpd 23,982

4902 Expended auth - pd 23,982
9

5. Assume straight line depreciation method is

used.

1 D514 Proprietary

6710 Depreciation expense 20,000

1819 Acc Dep for cap lease asset 20,000

Budgetary

None

 6. To record accrued interest at the end of the

year

1

B322

B134

B322

Proprietary

6330 Other interest expense 7,602

2140 Accrued interest payable 7,602

3100 Unexpended appropriation 7,602

5700 Appropriations used 7,602

Budgetary

4610 Allotment 7,602

4901 Expended auth - unpd 7,602

7. To record receipt of appropriation,

apportionment, and allotment for the interest

accrual at the end of the year.

2

A104

A104

A116

A120

Proprietary

1010 FBWT 5,964

3100 Unexpended appropriation 5,964

Budgetary

4119 Appropriation realized 5,964

4450 Unapportioned auth 5,964

4450 Unapportioned auth 5,964

4510 Apportionment 5,964

4510 Apportionment 5,964

4610 Allotment 5,964
10

8. To record lease payment 2

B112

B110

B112

B110

Proprietary

2140 Accrued interest payable 7,602

2940 Capital Lease Liability 16,380

1010 FBWT 23,982

Budgetary

4901 Expended auth - unpd 23,982

4902 Expended auth - pd 23,982

9. To record depreciation expense 2 D514 Proprietary

6710 Depreciation expense 20,000

1819 Acc Dep for cap lease asset 20,000

Budgetary

None

10. To record accrued interest at the end of the

year

2

B322

B134

B322

Proprietary

6330 Other interest expense 5,964

2140 Accrued interest payable 5,964

3100 Unexpended appropriation 5,964

5700 Appropriations used 5,964

Budgetary

4610 Allotment 5,964

4901 Expended auth - unpd 5,964
11

11. To record receipt of appropriation,

apportionment, and allotment for the interest

accrual at the end of the year.

3

A104

A104

A116

A120

Proprietary

1010 FBWT 4,162

3100 Unexpended appropriation 4,162

Budgetary

4119 Appropriation realized 4,162

4450 Unapportioned auth 4,162

4450 Unapportioned auth 4,162

4510 Apportionment 4,162

4510 Apportionment 4,162

4610 Allotment 4,162

12. To record lease payment 3

B112

B110

B112

B110

Proprietary

2140 Accrued interest payable 5,964

2940 Capital Lease Liability 18,018

1010 FBWT 23,982

Budgetary

4901 Expended auth - unpd 23,982

4902 Expended auth - pd 23,982

13. To record depreciation expense 3 D514 Proprietary

6710 Depreciation expense 20,000

1819 Acc Dep for cap lease asset 20,000

Budgetary

None
12

14. To record accrued interest at the end of the

year

3

B322

B134

B322

Proprietary

6330 Other interest expense 4,162

2140 Accrued interest payable 4,162

3100 Unexpended appropriation 4,162

5700 Appropriations used 4,162

Budgetary

4610 Allotment 4,162

4901 Expended auth - unpd 4,162

15. To record receipt of appropriation,

apportionment, and allotment for the interest

accrual at the end of the year.

4

A104

A104

A116

A120

Proprietary

1010 FBWT 2,182

3100 Unexpended appropriation 2,182

Budgetary

4119 Appropriation realized 2,182

4450 Unapportioned auth 2,182

4450 Unapportioned auth 2,182

4510 Apportionment 2,182

4510 Apportionment 2,182

4610 Allotment 2,182
13

16. To record lease payment 4

B112

B110

B112

B110

Proprietary

2140 Accrued interest payable 4,162

2940 Capital Lease Liability 19,820

1010 FBWT 23,982

Budgetary

4901 Expended auth - unpd 23,982

4902 Expended auth - pd 23,982

17. To record depreciation expense 4 D514 Proprietary

6710 Depreciation expense 20,000

1819 Acc Dep for cap lease asset 20,000

Budgetary

None

18. To record accrued interest at the end of the

year

4

B322

B134

B322

Proprietary

6330 Other interest expense 2,182

2140 Accrued interest payable 2,182

3100 Unexpended appropriation 2,182

5700 Appropriations used 2,182

Budgetary

4610 Allotment 2,182

4901 Expended auth - unpd 2,182
4

 A11, Appendix B, pg 407 states that “ . . . For leases financed by annual or multi year budget authority, agencies should ensure

that the appropriations language allows the budget authority to remain available for lease payments over the full term of the lease. If this

period is expected to be longer than five fiscal years after the authority expires, the appropriations language should include the provision

described in section 96.5".

14

19. To record lease payment4 5

B112

B110

B112

B110

Proprietary

2140 Accrued interest payable 2,182

2940 Capital Lease Liability 21,800

1010 FBWT 23,982

Budgetary

4901 Expended auth - unpd 23,982

4902 Expended auth - pd 23,982

20. To record depreciation expense 5 D514 Proprietary

6710 Depreciation expense 20,000

1819 Acc Dep for cap lease asset 20,000 

Budgetary

None

21. To return the leased equipment back to the

lessor.

5

C310

Proprietary

1819 Acc Dep for cap lease asset 100,000

1810 Assets Under Capital Lease 100,000

Budgetary

None
15

STATEMENTS FOR YEAR 1 STATEMENTS FOR YEAR 2

PRE-CLOSING TRIAL BALANCE - CAPITAL LEASE, YR1 PRE-CLOSING TRIAL BALANCE - CAPITAL LEASE, YR 2

Proprietary

1010 Fund Balance with Treasury 83,620

1810 Asset under capital lease 100,000

1819 Accumulated depreciation - C.L. 20,000

2140 Accrued interest payable 7,602

2940 Capital lease liability 76,018

3100 Unexpended appropriation -0-

5700 Appropriations used 107,60

2

6710 Depreciation expense 20,000

6330 Other interest expense 7,602

Budgetary

4119 Appropriation realized 107,602

4610 Allotment -0-

4901 Expended authority - unpd 83,620

4902 Expended auth - pd 23,982

Proprietary

1010 Fund Balance with Treasury 65,602

1810 Asset under capital lease 100,000

1819 Accumulated depreciation - C.L. 40,000

2140 Accrued interest payable 5,964

2940 Capital lease liability 59,638

3100 Unexpended appropriation - 0 -

3310 Cumulative results 80,000

5700 Appropriation used 5,964

6330 Interest expense 5,964

6710 Depreciation expense 20,000

Budgetary

4119 Appropriations realized 5,964

4201 Total actual resources collected 83,620

4901 Expended authority - unpd 65,602

4902 Expended auth - pd 23,982

STATEMENT OF NET COST - CAPITAL LEASE, YR1 STATEMENT OF NET COST - CAPITAL LEASE, YR 2
16

6330 Other interest expense 7,602

6710 Depreciation expense 20,000

Net cost 27,602

6330 Interest expense 5,964

6710 Depreciation expense 20,000

Net cost 25,964

STATEMENT OF FINANCING - CAPITAL LEASE, YR1 STATEMENT OF FINANCING - CAPITAL LEASE, YR 2

Line 1 Obligation and Nonbudgetary Resources

4901 83,620

4902 23,982

Line 2C1

1810 (100,000)

Line 3A

6710 20,000

Net Cost 27,602

Line 1 Obligation and Nonbudgetary Resources

4901E-B (65,602 - 83,620) (18,018)

4902E 23,982

Line 3A

6710 20,000

Net Cost 25,964

SF 133 - CAPITAL LEASE, YR1 SF 133 - CAPITAL LEASE, YR 2
17

Line1 Budget authority

4119 107,602

Line 7 Total budgetary resources 107,602

Line 8 Obligations incurred

4901 E-B 83,620

4902 E 23,982

Line 9 Unobligated balance (available)

4610E -0- 

Line 11 Total budgetary resources 107,602

Line 14D Obligated balance

4901 E 83,620

Line 15 Outlays

4902 E 23,018

Line 1

4119 5,964

Line 2

4201B 83,620

4901B (83,620)

Line 7 Total budgetary resources 5,964

Line 8 Obligations incurred

4901 E-B (65,602 - 83,620) (18,018)

4902 E 23,982

Line 11 Total budgetary resources 5,964

Line 14D Obligated balance

4901 E 65,602

Line 15 Outlays

4902 E 23,982

CLOSING ENTRY, YR1 CLOSING ENTRY, YR 2
18

Proprietary

3310 Cumulative result 27,602

6330 Other interest expense 7,602

6710 Depreciation expense 20,000

5700 Appropriations used 107,602

3310 Cumulative result 107,602

Budgetary

4201 Total actual resources coll 107,602

4119 Appropriation realized 107,60

2

4902 Expended auth - pd 23,982

4201 Total actual resources coll 23,982

4201 = 4450 + 4901

83,620 = -0- + 83,620

Proprietary

3310 Cumulative result 25,964

6330 Interest expense 5,964

6710 Depreciation expense 20,000

5700 Appropriations used 5,964

3310 Cumulative result 5,964

Budgetary

4902 Expended auth - pd 23,982

4201 Total actual resources coll 23,982

4201 Total actual resources coll 5,964

4119 Appropriations realized 5,964

4201 = 4450 + 4901

65,602 = - 0 - + 65,602
19

March 7, 2001

Part II. OPERATING LEASES

This case study illustrates basic operating lease transactions. It does not include all situations
20

OPERATING LEASE BETWEEN TWO FEDERAL AGENCIES

Assume this is a X year appropriation

DESCRIPTION Y

R

LESSEE REF LESSOR REF

1. To record funding. 

Lessee agency signs a lease

agreement for an equipment. 

The term of the lease is for

three years and the annual

lease payment is $25,000. 

(This lease agreement is

classified as an operating

lease). The lease payment is

made at the beginning of the

year.

1 Proprietary

1010 FBWT 25,000

3100 Unexpended appropriation 25,000

Budgetary

4119 Appropriation realized 25,000

4450 Unapportioned auth 25,000

4450 Unapportioned auth 25,000

4510 Apportionment 25,000

4510 Apportionment 25,000

4610 Allotment 25,000

4610 Allotment 25,000

4801 Unexpended obligations - unpd 25,000

A104

A104

A116

A120

B204

Proprietary

1010 FBWT 160,000

3100 Unexp app 160,000

Budgetary

4119 App realized 160,000

4070 Anticipated coll from fed 25,000

4450 Unapportioned auth 185,000

4450 Unapportioned auth 185,000

4510 Apportionment 160,000

4590 App Unava - Ant res 25,000

4510 Apportionment 160,000

4610 Allotment 160,000

A104

A104

A140

A116

A118

A120
21

2. The lessor purchased the

equipment that will be

leased to the lessee at the

beginning of the year 1 for

$160,000

1 Proprietary

None

Budgetary

None

Proprietary

1750 Equipment 160,000

1010 FBWT 160,000

3100 Unexp app 160,000

5700 App used 160,000

Budgetary

4610 Allotment 160,000

4902 Expended authority - pd 160,000

B302

B110

B134

B204

B302

B110

3. To make a lease payment 1 Proprietary

6100 Operating expense 25,000

1010 FBWT 25,000

3100 Unexpended appropriation 25,000

5700 Appropriations used 25,000

Budgetary

4801 Unexpended obligations - unpd 25,000

4902 Expended authority - pd 25,000

B302

B110

B134

B302

B110

Proprietary

1010 FBWT 25,000

5200 Rev from serv prov 25,000

“Or” 5900 Other Revenue XXXX

Budgetary

4277 Other actual coll - fed 25,000

4070 Anticipated coll from fed 25,000

4590 App Unava - Ant res 25,000

4610 Allotment 25,000

C110

Add to

C110

C110?

C186?

A122

4. To record depreciation

expense

 with useful life of 8 years. 

The lessor will depreciate

using the straight line

method.

1 Proprietary

None

Budgetary

None

Proprietary

6710 Depreciation 20,000

1759 Accumulated Dep 20,000

Budgetary

None

D514
22

5. To record appropriation,

apportionment and

allotment for rent payment. 

2-3 Proprietary

1010 FBWT 25,000

3100 Unexpended appropriation 25,000

Budgetary

4119 Appropriation realized 25,000

4450 Unapportioned auth 25,000

4450 Unapportioned auth 25,000

4510 Apportionment 25,000

4510 Apportionment 25,000

4610 Allotment 25,000

4610 Allotment 25,000

4801 Unexpended obligations - unpd 25,000

A104

A104

A116

A120

B204

Proprietary

None

Budgetary

4070 Anticipated coll from fed 25,000

4450 Unapportioned auth 25,000

4450 Unapportioned auth 25,000

4590 App Unava - Ant Res 25,000

A140

A118

6. To record rent payment

for year 2

2-3 Proprietary

6100 Operating expense 25,000

1010 FBWT 25,000

3100 Unexpended appropriation 25,000

5700 Appropriations used 25,000

Budgetary

4801 Unexpended obligations - unpd 25,000

4902 Expended authority - pd 25,000

B302

B110

B134

B302

B110

Proprietary

1010 FBWT 25,000

5200 Rev from serv prov 25,000

“Or” 5900 Other Revenue XXXX

Budgetary

4277 Other actual coll - fed 25,000

4070 Anticipated coll from fed 25,000

4590 App Unava - Ant res 25,000

4610 Allotment 25,000

C110

Add to

C110

A122

7. To record depreciation

expense

2-3 Proprietary

6710 Depreciation 20,000

1759 Accumulated Dep 20,000

Budgetary

None

D514
23

YEAR 1

PRE-CLOSING TRIAL BALANCE FOR LESSEE PRE-CLOSING TRIAL BALANCE FOR LESSOR

Proprietary

1010 FBWT 0

3100 Unexpended appropriation 0

5700 Appropriations used 25,000

6100 Operating expense 25,000

Budgetary

4119 Appropriation realized 25,000

4902 Expended authority - pd 25,000

Proprietary

1010 FBWT 25,000

1750 Equipment 160,000

1759 Accumulated Dep 20,000

5200 Rev from serv prov 25,000

5700 Appropriations used 160,000

6710 Depreciation 20,000

Budgetary

4119 Appropriation realized 160,000

4277 Other actual coll - fed 25,000

4610 Allotment 25,000

4902 Expended authority - pd 160,000
24

STATEMENT OF NET COST STATEMENT OF NET COST

6100 Operating expense 25,000

Net Cost 25,000

6710 Depreciation 20,000

5200 Rev from serv prov (25,000)

Net Cost (5,000)

STATEMENT OF FINANCING STATEMENT OF FINANCING

Line 1a 

4902 Expended authority - pd 25,000

Net Cost 25,000

Line 1a

4902 Expended authority - pd 160,000

Line 1b

4277 Other actual coll - fed (25,000)

135,000

Line 2C1

1750 Equipment (160,000)

Line 3a

6710 Depreciation 20,000

(140,000)

Net Cost (5,000)

133 133
25

Line 1

4119 Appropriation realized 25,000

Line 8

4902 Expended authority - pd 25,000

Line 15a

4902 Expended authority - pd 25,000

Line 1

4119 Appropriation realized 160,000

Line 3

4277 Other actual coll - fed 25,000

Line 8

4902 Expended authority - pd 160,000

Line 9

4610 allotment 25,000

Line 15a

4902 Expended authority - pd 160,000
26

OPERATING LEASE WITH NON-FEDERAL ENTITY

Budgetary Requirements

OMB A11, Appendices A and B state that “For operating leases, budget authority will be scored against the legislation in the year in

which the budget authority is first made available in the amount necessary to cover the Government’s legal obligations. The amount

scored will include 

1) The estimated total payments expected to arise under the full term of a lease contract or, 

2) If the contract will include a cancellation clause, an amount sufficient to cover the costs for the first fiscal year during which the

contract is in effect, plus amount sufficient to cover the costs associated with cancellation of the contract. 

3) For funds that are self-insuring (GSA) under exiting authority, only budget authority to cover the annual lease payment is required to

be scored”.

Like the capital lease and lease purchases, the requirements described above for operating lease are intended for those agencies that have

a lease with nonfederal entity. 

Assume agencies have X year funding for simplicity.
5

 OMB Circular A11, Appendix B, “ . . .For operating leases, budget authority will be scored against the legislation in the year in

which the budget authority is first made available in the amount necessary to cover the Government’s legal obligations. The amount

scored will include th estimated total payments expected to arise under the full term of a lease contract . . .” 

27

I. OPERATING LEASE WITH NON-FEDERAL ENTITY - without a cancellation clause5

DESCRIPTION YR LESSEE REF

1) To record funding. The lessee

agency signs a 3 year lease

agreement on an equipment. 

Yearly rent payment is $10,000.

1 Proprietary

1010 FBWT 30,000

3100 Unexpended app 30,000

Budgetary

4119 Appropriation realized 30,000

4450 Unapportioned auth 30,000

4450 Unapportioned auth 30,000

4510 Apportionment 30,000

4510 Apportionment 30,000

4610 Allotment 30,000

4610 Allotment 30,000

4801 Unexp oblig - unpd 30,000

A104

A104

A116

A120

B204
28

2) The annual rent payment is

made

1-3 Proprietary

6100 Operating expense 10,000

1010 FBWT 10,000

3100 Unexpended app 10,000

5700 Appropriations used 10,000

Budgetary

4801 Unexp oblig - unpd 10,000

4902 Expended auth - pd 10,000

B302

B110

B134

B302

B110
29

YEAR 1

PRE-CLOSING TRIAL BALANCE STATEMENT OF FINANCING

Proprietary

1010 FBWT 20,000

3100 Unexpended app 20,000

6100 Operating expense 10,000

5700 Appropriations used 10,000

Budgetary

4119 Appropriation realized 30,000

4801 Unexp oblig - unpd 20,000

4902 Expended auth - pd 10,000

Line 1

4801 Unexp oblig - unpd 20,000

4902 Expended auth - pd 10,000

Line 2

4801 Unexp oblig - unpd (20,000)

Net Cost 10,000

NET COST 133

6100 Operating expense 10,000

Net Cost 10,000

Line 1

4119 Appropriation realized 30,000

Line 8

4801 Unexp oblig - unpd 20,000

4902 Expended auth - pd 10,000

Line 14

4801 Unexp oblig - unpd 20,000

Line 15

4902 Expended auth - pd 10,000
6

 OMB Circular A11, Appendix B, “ . . . . if the contract includes a cancellation clause, an amount sufficient to cover the lease

payments for the first year plus and amount sufficient to cover the costs associated with cancellation of the contract. (For each

subsequent year, sufficient budget authority is required to cover the annual lease payment plus any additional cancellation costs.)”

30

II. OPERATING LEASE WITH NON-FEDERAL ENTITY - with a cancellation clause6

DESCRIPTION YR LESSEE

1) To record funding. The lessee agency

signs a 3 year lease agreement on an

equipment. Yearly rent payment is

$10,000 and the penalty for cancellation is

$5,000.

1 Proprietary

1010 FBWT 15,000

3100 Unexpended app 15,000

Budgetary

4119 Appropriation realized 15,000

4450 Unapportioned auth 15,000

4450 Unapportioned auth 15,000

4510 Apportionment 15,000

4510 Apportionment 15,000

4610 Allotment 15,000

4610 Allotment 15,000

4801 Unexp oblig - unpd 15,000

A104

A104

A116

A120

B204
31

2) The annual rent payment is made 1 Proprietary

6100 Operating expense 10,000

1010 FBWT 10,000

3100 Unexpended app 10,000

5700 Appropriations used 10,000

Budgetary

4801 Unexp oblig - unpd 10,000

4902 Expended auth - pd 10,000

B302

B110

B134

B302

B110

3) To record appropriation, apportionment

and allotment for the rent payments

2-3 Proprietary

1010 FBWT 10,000

3100 Unexpended app 10,000

Budgetary

4119 Appropriation realized 10,000

4450 Unapportioned auth 10,000

4450 Unapportioned auth 10,000

4510 Apportionment 10,000

4510 Apportionment 10,000

4610 Allotment 10,000

4610 Allotment 10,000

4801 Unexp oblig - unpd 10,000

A104

A104

A116

A120

B204
32

4) The annual rent payment is made 2-3 Proprietary

6100 Operating expense 10,000

1010 FBWT 10,000

3100 Unexpended app 10,000

5700 Appropriations used 10,000

Budgetary

4801 Unexp oblig - unpd 10,000

4902 Expended auth - pd 10,000

B302

B110

B134

B302

B110

5) To record downward adjustments of

obligations incurred in year 1for penalty

clause of $5,000 which was not exercised

and not outlayed.

3 Proprietary

None

Budgetary

4871 Down. adj. of PY unexp oblig 5,00

0

4450 Unapportioned authority 5,00

0

D134
33

YEAR 1 YEAR 3

PRE-CLOSING TRIAL BALANCE for YEAR 1 PRE-CLOSING TRIAL BALANCE for YEAR 3

Proprietary

1010 Fund Balance with Treasury 5,000

3100 Unexpended appropriation 5,000

6100 Operating expense 10,000

5700 Appropriations used 10,000

Budgetary

4119 Appropriation realized 15,000

4801 Unexpended obligation - unpd 5,00

0

4902 Expended auth - pd 10,000

Proprietary

6100 Operating expense 10,000

5700 Appropriations used 10,000

Budgetary

4201 Total actual resources collected 5,000

4119 Appropriation realized 10,000

4801 Unexpended obligation - unpd 5,00

0

4902 Expended auth - pd 10,000

4871 Down. adj. of PY unexp oblig 5,000

4450 Unapportioned authority 5,000

NET COST for YEAR 1 NET COST for YEAR 3

6100 Operating expense 10,000

Net Cost 10,000

6100 Operating expense 10,000

Net Cost 10,000

STATEMENT OF FINANCING for YEAR 1 STATEMENT OF FINANCING for YEAR 3
34

Line 1

4801 Unexpended obligation - unpd 5,000

4902 Expended auth - pd 10,000

Line 2A

4801 Unexpended obligation - unpd (5,000)

Net Cost 10,000

Line 1

4902 Expended auth - pd 10,000

4871 Down. adj. of PY unexp oblig (5,000)

Line 2

4871 Down. adj. of PY unexp oblig 5,000

Net cost 10,000

133 for YEAR 1 133 for YEAR 3

Line 1

4119 Appropriation realized 15,000

Line 8

4801 Unexpended obligation - unpd 5,000

4902 Expended auth - pd 10,000

Line 14

4801 Unexpended obligation - unpd 5,000

Line 15

4902 Expended auth - pd 10,000

Line 1

4119 Appropriation realized 10,000

Line 4

4871 Down. adj. of PY unexp oblig 5,000

Line 8

4902 Expended auth - pd 10,000

Line 10

4450 Unapportioned authority 5,000

Line 14

4871 Down. adj. of PY unexp oblig 5,000

Line 15

4902 Expended auth - pd 10,000

CLOSING ENTRIES for YEAR 1 CLOSING ENTRIES for YEAR 3
7OMB A11, Appendix A, states that “ . . . . . . For funds that are self-insuring under exiting authority, only budget authority to

cover the annual lease payment is required to be scored”. According to OMB, GSA is the only agency designated as “self insuring” fund

at this time.

35

Proprietary

3310 Cumulative results 10,000

6100 Operating expense 10,000

5700 Appropriations used 10,000

3310 Cumulative results 10,000

Budgetary

4902 Expended auth - pd 10,000

4201 Total actual resources collected 10,0

00

4201 Total actual resources collected 15,000

4119 Appropriation realized 15,0

00

Proprietary

3310 Cumulative results 10,000

6100 Operating expense 10,000

5700 Appropriations used 10,000

3310 Cumulative results 10,000

Budgetary

4902 Expended auth - pd 10,000

4201 Total actual resources collected 10,0

00

4201 Total actual resources collected 10,000

4119 Appropriation realized 10,0

00

4801 Unexp oblig - unpd 5,000

4871 Down. adj. of PY unexp oblig 5,00

0

III. OPERATING LEASE7 WITH NON-FEDERAL ENTITY ON RENT ABATEMENT 

Assume this is a self insuring fund.

A. RENT ABATEMENT ON FIRST 3 YEARS OF THE LEASE

DESCRIPTION YR LESSEE REF
36

1) To record funding. The lessee

agency signs a 15 year lease

agreement on a building. The land

lord gives the agency a special deal

where they only have to pay for last

12 years and the first 3 years are rent

free. Yearly rent payment is $10,000.

1-3 Proprietary

6800 Future funded expenses 8,000

2990 Other liabilities 8,000

Budgetary

None

B324

add

2290 to

B324

2) Appropriation, apportionment and

allotment is received.

4-15 Proprietary

1010 FBWT 10,000

3100 Unexpended app 10,000

Budgetary

4119 Appropriation realized 10,000

4450 Unapportioned auth 10,000

4450 Unapportioned auth 10,000

4510 Apportionment 10,000

4510 Apportionment 10,000

4610 Allotment 10,000

4610 Allotment 10,000

4801 Unexp oblig - unpd 10,000

A104

A104

A116

A120

B204
37

3) Rent payment is made 4-15 Proprietary

6100 Operating expense 8,000

2990 Other liability 2,000

1010 FBWT 10,000

6100 Operating expense 2,000

6800 Future funded expenses 2,000

3100 Unexpended app 10,000

5700 Appropriation used 10,000

Budgetary

4801 Unexp oblig - unpd 10,000

4902 Expended authority - pd 10,000

B302

B110

B134

B302

B110
38

PRE-CLOSING TRIAL BALANCE FOR YR 1 CLOSING ENTRIES FOR YEAR 1

Proprietary

6800 Future funded expenses 8,000

2990 Other liabilities 8,000

Budgetary

None

Proprietary

3310 Cumulative results 8,000

6800 Future funded expenses 8,000

Budgetary

None

NET COST for YEAR 1

6800 Future funded expenses 8,000

Net Cost 8,000

STATEMENT OF FINANCING for YEAR 1

Line 4 

6800 Future funded expenses 8,000

Net Cost 8,000
39

B. RENT ABATEMENT ON LAST 3 YEARS OF THE LEASE

DESCRIPTION YR LESSEE REF

1) To record funding. The lessee

agency signs a 15 year lease agreement

on a building. The land lord gives the

agency a special deal where they only

have to pay for 12 years and the last 3

years are rent free. Yearly rent payment

is $10,000.

1-12 Proprietary

1010 FBWT 10,000

3100 Unexpended app 10,000

Budgetary

4119 Appropriation realized 10,000

4450 Unapportioned auth 10,000

4450 Unapportioned auth 10,000

4510 Apportionment 10,000

4510 Apportionment 10,000

4610 Allotment 10,000

4610 Allotment 10,000

4801 Unexp oblig - unpd 10,000

A104

A104

A116

A120

B204
40

2) Rent payment is made 1-12 Proprietary

6100 Operating expense 8,000

1450 Prepayment 2,000

1010 FBWT 10,000

3100 Unexpended app 8,000

5700 Appropriations used 8,000

Budgetary

4801 Unexp oblig - unpd 10,000

4802 Unexp oblig - pd 2,000

4902 Expended auth - pd 8,000

B302

B110

B134

B302

B110

3) Rent free years

 

See B404 in SGL Section III

13-15 Proprietary

6100 Operating expense 8,000

1450 Prepayment 8,000

3100 Unexpended app 8,000

5700 Appropriations used 8,000

Budgetary

4802 Unexp oblig - pd 8,000

4902 Expended auth - pd 8,000

B302

B134

B302

B110
41

YEAR 1

PRE-CLOSING TRIAL BALANCE FOR YR 1 CLOSING ENTRIES FOR YR 1
42

Proprietary

1450 Prepayment 2,000

3100 Unexpended app 2,000

6100 Operating expense 8,000

5700 Appropriations used 8,000

Budgetary

4119 Appropriation realized 10,000

4802 Unexp oblig - pd 2,000

4902 Expended auth - pd 8,000

Proprietary

3310 Cumulative results 8,000

6100 Operating expense 8,000

5700 Appropriations used 8,000

3310 Cumulative results 8,000

Budgetary

4201 Total actual resources collected 10,000

4119 Appropriation realized 10,0

00

4902 Expended auth - pd 8,000

4201 Total actual resources collected

NET COST FOR YR 1

6100 Operating expense 8,000

Net Cost 8,000

STATEMENT OF FINANCING

Line 1

4802 Unexp oblig - pd 2,000

4902 Expended auth - pd 8,000

Line 2

4802 Unexp oblig - pd (2,000)

Net cost 8,000