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

• A. A debit to Lease Obligation Payable.
• B. A credit to Lease Obligation Payable.
• C. A debit to Lease Expense.
• D. A credit to Cash.

Answer: (A)

When a government pays on an outstanding lease obligation, the principal portion reduces the liability. That means you debit the Lease Obligation Payable to lower the liability on the books. At the same time, cash is credited to reflect the outflow of resources. The option reflecting the liability reduction is the best choice because it shows the correct direction of the liability change. The other options would either increase the liability, recognize an expense in place of reducing principal, or describe only part of the full entry (the cash outflow) without capturing the liability reduction.