Assume that on January 1, 2017, Kimberly-Clark Corp. signs a 10-year noncancelab
ID: 2338415 • Letter: A
Question
Assume that on January 1, 2017, Kimberly-Clark Corp. signs a 10-year noncancelable lease agreement to lease a storage building from Sheffield Storage Company. The following information pertains to this lease agreement.
1. The agreement requires equal rental payments of $76,100 beginning on January 1, 2017.
2. The fair value of the building on January 1, 2017 is $414,000.
3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of $9,700. Kimberly-Clark depreciates similar buildings on the straight-line method.
4. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.
5. Kimberly-Clark’s incremental borrowing rate is 12% per year. The lessor’s implicit rate is not known by Kimberly-Clark.
6. The yearly rental payment includes $10,679 of executory costs related to taxes on the property.
Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2017 and 2018. Kimberly-Clark’s corporate year-end is December 31. (Hint: Do the table for ten periods based on present value of minimum lease payments.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and
(To record the lease.) (To record first payment.)(To record depreciation.)(To record interest.)(To record second payment.)(To record depreciation.)(To record interest.)
Explanation / Answer
Prepare the journal entries as follows:
Notes:
Annual
Rent
Lease
liability
Date Account Title and Explanation Debit Credit 1/1/2017 Leased building $414,000 Lease liability $414,000 To record capital lease liability 1/1/2017 Executory costs $10,679 Lease lability $65,421 Cash $76,100 To record annual rental paid 12/31/2017 Depreciation expense (414,000 ÷ 10) $41,400 Accumulated depreciation - Leased building $41,400 To record annual depreciation expense 12/31/2017 Interest expense (Note: lease amortization schedule) $41,829 Interest payable $41,829 To record interest expense 1/1/2018 Executory costs $10,679 Lease lability $23,592 Interest payable $41,829 Cash $76,100 To record annual rental paid 12/31/2018 Depreciation expense (414,000 ÷ 10) $41,400 Accumulated depreciation - Leased building $41,400 To record annual depreciation expense 12/31/2018 Interest expense (Note: lease amortization schedule) $38,998 Interest payable $38,998 To record interest expense