Assume that on December 31, 2016, Kimberly-Clark Corp. signs a 10-year, non-canc
ID: 2527361 • 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:
Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
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 2016, 2017, and 2018. Kimberly-Clark’s fiscal year-end is December 31. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 5,275.)
Date
Account Titles and Explanation
Debit
Credit
12/31/16
(To record the lease)
(To record first lease payment)
12/31/17
(To record amortization of the right-of-use asset)
(To record interest expense)
12/31/18
(To record amortization of the right-of-use asset)
(To record interest expense)
1. The agreement requires equal rental payments of $67,799 beginning on December 31, 2016. 2. The fair value of the building on December 31, 2016 is $496,890. 3. The building has an estimated economic life of 12 years, a guaranteed residual value of $12,000, and an expected residual value of $8,300. 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 8% per year. The lessor’s implicit rate is not known by Kimberly-Clark. 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 $67,799 beginning on December 31, 2016 2. The fair value of the building on December 31, 2016 is $496,890 3. The building has an estimated economic life of 12 years, a guaranteed residual value of $12,000, and an expected residual value of $8,300. 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 lesso Kimberly-Clark's incremental borrowing rate is 8% per year. The lessor's implicit rate is not known by Kimberly-Clark. 4. 5. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) 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 2016, 2017, and 2018. Kimberly Clark's fiscal year-end is December 31. (Credit account titles are automatically indented when amount is entered. Do not indent manually, Round answers to o decimal places e.g. 5,275.)Explanation / Answer
Journal Entry Date Account Tittle & Explanation Debit Credit 31/12/2016 Leased Equipment $496,890.00 Obligations under Capital Leases $496,890.00 To Record Leased Asset & liability 31/12/2016 Obligations under Capital Leases $67,799.00 Cash $67,799.00 To Record Lease rental Payment made 31/12/2017 Obligations under Capital Leases $33,472.00 Interest Expense $34,327.00 Cash $67,799.00 To Record Lease Payment and Interest expense 31/12/2017 Amortization Expense on Leased Equipment $48,489.00 Accumulated Amortization of Leased Equipment $48,489.00 ( $496890-$12000)/10 To Record Amortisation Expense 31/12/2018 Obligations under Capital Leases $36,149.00 Interest Expense $31,650.00 Cash $67,599.00 To Record Lease Payment and Interest expense 31/12/2018 Amortization Expense on Leased Equipment $48,489.00 Accumulated Amortization of Leased Equipment $48,489.00 ( $496890-$12000)/10 To Record Amortisation Expense Lease Amortization Schedule Date Annual Lease Payment Plus BPO Interest on Liability @8% Reduction of Lease Liability Lease Liability 31/12/2016 $496,890 31/12/2016 $67,799 $67,799 $429,091 31/12/2017 $67,799 $34,327.28 $33,472 $395,619 31/12/2018 $67,799 $31,650 $36,149 $359,470 31/12/2019 $67,799 $28,758 $39,041 $320,428 31/12/2020 $67,799 $25,634 $42,165 $278,264 31/12/2021 $67,799 $22,261 $45,538 $232,726 31/12/2022 $67,799 $18,618 $49,181 $183,545 31/12/2023 $67,799 $14,684 $53,115 $130,429 31/12/2024 $67,799 $10,434 $57,365 $73,065 31/12/2025 $67,799 $5,845 $61,954 $11,111 31/12/2025 $12,000 $888.88 $11,111 $0