Assume that on January 1, 2017, Kimberly-Clark Corp. signs a 10-year noncancelab
ID: 2524963 • 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 $65,700 beginning on January 1, 2017. 2. The fair value of the building on January 1, 2017 is $424,000. 3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of $10,500. 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 $839 of executory costs related to taxes on the property.Explanation / Answer
Capitalized amount of lease :
Yearly payment 65,700
Less : Executory cost (839)
Minimum annual lease payment $64,861
Present value factor (11%,10 yrs) 6.53705
PV of minimum lease payments 423,999.60 = $424,000
Journal entries:
1/1/2017 Leased Building 424,000
Lease Liability 424,000
(To record the lease)
Executory Cost-Property tax 839
Lease Liability 64,861
Cash 65,700
(To record first payment)
12/31/2017
Depreciation Expense 42,400
Accumulated Depreciation-Capital Lease 42,400
(424,000/10 - To record depreciation)
Interest Expense 39,505.29
Interest Payable 39,505.29
(To record Interest - see table at last)
1/1/2018
Executory Cost 839
Interest Payable 39,505.29
Lease Liability 25,355.71
Cash 65,700
(To record second payment - refer to last table)
Depreciation Expense 42,400
Accumulated Depreciation-Capital Lease 42,400
(To record depreciation)
Interest Expense 36,716.16
Interest Payable 36,716.16
(To record Interest - refer to last table)
Lease Amortization Schedule:
Date Annual Payment - Executory Cost Interest(11%) on liability Reduction of Lease Liability Lease Liability 01/01/2017 424,000.00 01/01/2017 64,861.00 0.00 64,861.00 359,139.00 01/01/2018 64,861.00 39,505.29 25,355.71 333,783.29 01/01/2019 64,861.00 36,716.16 28,144.84 305,638.45