Assume that on January 1, 2017, Kimberly-Clark Corp. signs a 10-year noncancelab
ID: 2410620 • 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.
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 enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)
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Date
Account Titles and Explanation
Debit
Credit
(To record the lease.)
(To record first payment.)
(To record depreciation.)
(To record interest.)
1/1/18
(To record second payament.)
(To record depreciation.)
(To record interest.)
1. The agreement requires equal rental payments of $78,200 beginning on January 1, 2017. 2. The fair value of the building on January 1, 2017 is $404,000. 3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of $9,200. 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 11% per year. The lessor’s implicit rate is not known by Kimberly-Clark. 6. The yearly rental payment includes $16,398 of executory costs related to taxes on the property.Explanation / Answer
Journal entries in the books of lessee in 2017 and 2018 Date Account Titles & Explanations Debit Credit 1-Jan-17 Leased Equipment $404,003 Leased Liability $404,003 (To record leased equipment) 1-Jan-17 Leased Liability $61,802 Executory Cost $16,398 Cash $78,200 (To record annual rental payment) 31-Dec-17 Depreciation $40,400 Accumulated Depreciation-Capital Lease $40,400 $404,000/10 (To record Depreciation for 2017) 31-Dec-17 Interest Expense $37,642 Interest Payable $37,642 (To record Interest expense for 2017) ($404,003-$61802) x 11% 1-Jan-18 Leased Liability $24,160 Interest payable $37,642 Executory Cost $16,398 Cash $78,200 (To record annual rental payment) 31-Dec-18 Depreciation $40,400 Accumulated Depreciation-Capital Lease $40,400 $404,000/10 (To record Depreciation for 2018) 31-Dec-18 Interest Expense $34,985 Interest Payable $34,985 (To record Interest expense for 2018) ($404003 -$61802 - $24160) x 11% Present value of minimum lease payment Annual Payment $78,200 Less: Executory costs $16,398 Minimum annual payment $61,802 Present value of minimum lease payment $404,003 ($61802 x 6.53705) Interest rate = 11% Period = 10 years