When Capitol City makes its annual lease payment on an unpaid lease obligation, the journal entry for the debt service fund accounts will include:

• A. A debit to Expenditures—Principal of Lease Obligation.
• B. A debit to Expenditures—Interest of Lease Obligation.
• C. A credit to Expenditures—Principal of Lease Obligation.
• D. A debit to Cash.

Answer: (A)

When a debt service fund makes a payment on a lease obligation, the use of current financial resources is shown as a debt service expenditure that reduces the outstanding liability. If the payment is for the principal portion of the lease obligation, the expenditure recorded is Expenditures—Principal of Lease Obligation, reflecting the extinguishment of part of the long-term liability. The cash account is credited for the actual cash paid.

If there were an interest portion in the payment, that portion would be recorded as Expenditures—Interest of Lease Obligation, but the scenario here focuses on the principal reduction, so the principal expenditure is the entry that best fits.