Assume that on December 31, 2016, Kimberly-Clark Corp. signs a 10-year, non-canc
ID: 2520295 • Letter: A
Question
Assume that on December 31, 2016, Kimberly-Clark Corp. signs a 10-year, non-cancelable 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 $67,599 beginning on December 31, 2016. 2. The fair value of the building on December 31, 2016 is $494,051 3. The building has an estimated economic life of 12 years, a guaranteed residual value of $9,000, and an expected residual value of 4. 5, $5,500. Kimberly-Clark depreciates similar buildings on the straight-line method. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor. Kimberly-Clark's incremental borrowing rate is 8% per year. The lessor's implicit rate is not known by Kimberly-Clark. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.)Explanation / Answer
First of all, we need to compute the value of lease payable and right of use asset which will be equal to sum of present value of annual lease payments and present value of guaranteed residual value at the end of lease.
Lease Payable = PV of Annual Lease Payments+PV of Guaranteed residual value
= [Annual Lease Payment*PVAF(10, 8%) (at the beginning)]+[GRV*PVF(10, 8%)]
= ($67,599*7.24689)+($9,000*0.46319)
= $489,882+$4,169 = $494,051
Journal Entries (Amounts in $)
* Interest Expense for each year will be calculated on balance amount of lease payable outstanding for that year.
Date Account Titles and Explanation Debit Credit 12/31/16 Right of Use Asset 494,051 Lease Payable 494,051 (To record the lease) 12/31/16 Lease Payable 67,599 Cash 67,599 (To record first lease payment) 12/31/17 Amortization Expense ($494,051/12 yrs) 41,171 Right of Use Asset 41,171 (To record amortization of the right of use asset) 12/31/17 Interest Expense [($494,051-$67,599)*8%] 34,116 Lease Payable ($67,599-$34,116) 33,483 Cash 67,599 (To record interest expense) 12/31/18 Amortization Expense ($494,051/12 yrs) 41,171 Right of Use Asset 41,171 (To record amortization of the right of use asset) 12/31/18 Interest Expense [($494,051-$67,599-$33,483)*8%] 31,438 Lease Payable ($67,599-$31,438) 36,161 Cash 67,599 (To record interest expense)